Repayment Mortgages

A repayment mortgage is where the capital is repaid gradually over the term of the mortgage. Each monthly payment is made up of interest due on the outstanding debt (the cost of 'servicing' the loan), and an additional sum applied to reducing the capital balance.

In the early years most of each month's payment is comprised of interest. In later years, more capital is repaid with the result that the balance outstanding reduces.

Repayment mortgages have their pros & cons.

Advantages of Repayment Mortgages:

The mortgage will be repaid eventually, providing full monthly payments are maintained throughout the mortgage term (usually 25 years). The loan will be repaid whatever happens to the stockmarket or any other investment market.

Disadvantages of Repayment Mortgages:

In the early years of the loan, most of the monthly repayment goes to pay off interest - the capital outstanding on the mortgage is hardly reduced. There is no possibility of achieving any additional investment return or surplus at the end of the mortgage term. A separate mortgage protection (term assurance) policy ought to be taken out.

People who take out these straight forward (plain vanilla) mortgages, are usually urged to arrange a separate mortgage protection or term assurance policy, so that should the mortgage payer die, the debt can be immediately paid off by his/her heirs.

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Last Updated: January 2008 © Moneyextra.com

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