Why should you choose capital repayment mortgages?
You will often come across these mortgages being referred to as ‘capital and interest’ mortgages. This is because you pay the interest on the mortgage and then each month you also pay off a small amount of the overall mortgage debt. There are a number of benefits of taking out this type of mortgage over mortgages such as interest only mortgages.
The benefits of a capital repayment mortgage
Perhaps the biggest plus point for taking out a capital repayment mortgage is that at the end of your agreed mortgage term you will have paid off the entire debt and so your final payment will be used to clear the last of the mortgage loan. This will leave you as the owner of your property with no financial ties to your mortgage lender. This is in distinct contrast to an interest only mortgage in which you only pay off the interest on the loan each month. In this case, the original loan is still owed by you at the end of the mortgage term.
As the years go by, with a capital repayment mortgage, you will see your payments gradually reducing as you have to pay less and less interest on your loan. Compare this to an interest only loan where your payments will remain constant over the lifetime of the mortgage, although they will change with changes in interest rates. By paying off your mortgage you are also building up equity in your home and so if you decide to move you are more likely to have a larger deposit, which in turn will enable you to take advantage of mortgages with better interest rates due to your improved loan to value ratio of your mortgage.
The main disadvantage of a capital repayment mortgage is that you will find that your monthly payments are higher than for an interest only mortgage. This does mean that you are likely to have your higher mortgage payments when you are potentially least able to afford them. However, you should also consider the alternative in that if you have an interest only mortgage you will not only have to find your interest payments, you will also have to independently find a way of building up the funds to be able to pay off your mortgage loan at the end of the mortgage term.