What is a repayment mortgage?


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When you apply for a mortgage, you have a big choice to make. Do you choose an interest-only mortgage , or should you go for the repayment option?

To help you make the decision, here’s a rundown of the pros and cons of a repayment mortgage.

What is a repayment mortgage?

A repayment mortgage spreads the cost of your loan across a set time frame (usually 25 years) including interest. By the time you reach the end of your mortgage term, you will own your home outright, after repaying both the amount you borrowed initially, plus the interest.

Typically, the first few years are weighted towards the interest, while the remaining time is used for paying off the actual value of your mortgage. This is done due to the interest being calculated from the present outstanding balance of the mortgage, which decreases as more of the principal is repaid.

As long as you meet each monthly payment, your mortgages will be paid for in full at the end of the term and as long as you have no other borrowing secured on it, you will own your home.

What are the pros of a repayment mortgage?

There are lots of reasons to opt for a repayment mortgage instead of going interest only. Here are a few of the main advantages:

● You can be confident that your mortgage will be paid off entirely at the end of the term

● When you start paying off the original mortgage, the equity (mortgage value minus mortgage balance) in the home will increase if the loan balance is paid down or if the property value increases, which can work in your favour if you want to change mortgage lender or buy a second house

● Because it is paid off early, the total amount of interest you pay will be lower than an interest-only mortgage over the lifetime of the loan

And how about the cons?

There are a few drawbacks to choosing a repayment mortgage:

● Your monthly payments to the mortgage lender will be higher than an interest-only mortgage

● If you want to move house within a few years, you’ll still have the majority of the loan left to pay back as the first payments mainly cover the interest

As with every big financial decision, it’s worth taking your time to weigh up your options. Seek expert advice whenever possible, and make sure you research to find the best possible deal, whether you opt for an interest only or repayment mortgage.

This article on repayment mortgages was produced in collaboration with L&C, the UK’s leading fee-free mortgage experts.