Repayment Mortgages

The monthly payments you make on a repayment mortgage go towards paying off the loan amount and the interest charges. This makes your monthly repayments somewhat larger than those of an interest-only mortgage. However, this type of mortgage gives you the peace of mind that the amount you owe is decreasing with each payment you make.

When you take out a repayment mortgage, you agree to repay the debt over a number of years (typically twenty-five). This period of time is referred to as the mortgage term. At the end of the term, providing you have made all the repayments on-time, and in-full, the mortgage will have been repaid.

As you repay the mortgage, the interest payments decrease. This is because they are essentially a percentage of the you amount you owe, which is slowly being reduced. Assuming that your repayments are constant, more and more of your payment goes towards paying off the actual debt, rather than the interest charges. This is not the case with an interest-only mortgage; the actual loan amount itself is not repaid until the very end of the loan term, when it is paid off in one lump sum by a savings or investment plan.

The potential drawback of a repayment mortgage is that since your repayments initially pay off only a small amount of the actual loan, it can take many years before you manage to significantly reduce the amount you owe. If you wish to move house early on in your mortgage term, you may find that you still owe a large amount, because your repayments were paying off high interest charges rather than large amounts of your debt. This can be a problem if you were hoping to raise money from the sale of your house by profiting from the difference between the amount the property was sold for and the amount you owe on your mortgage.

In addition, repayment mortgages can be particularly expensive for a first time buyer. If you are worried about large monthly repayments, you may find that applying for an interest-only mortgage and then switching to a repayment mortgage when your income increases could offer you a good compromise.