How Repayment Mortgages Work
A capital repayment mortgage lets you pay back some of the capital you borrowed along with interest charges. It is one of a few repayment options.
When you borrow money to buy a home, the standard way to pay back that money is with a repayment mortgage. This means that each month you pay back some of the capital you borrowed along with interest charges.
What is a capital repayment mortgage?
With a capital repayment mortgage what you repay each month goes towards paying interest on your debt and paying off some of the initial amount you borrowed. At the start of your mortgage your repayments will be made up of more interest than capital. But, over time as your debt shrinks and the interest accruing on it falls this will shift until the bulk of your monthly repayment will go towards paying off the capital.
Provided you make all your monthly repayments you will have repaid everything you borrowed plus interest at the end of the mortgage term, usually up to 25 years.
What about interest only mortgages?
Historically some borrowers have taken out interest-only mortgages. With this type of mortgage you only pay back interest each month which means that at the end of the term you still need to repay the capital you borrowed.
The upside of this type of loan is that monthly repayments are much lower, the downside is that you need to work out how you will repay the original capital you borrowed at the end of the loan. This usually means setting up a savings or investment plan to repay the debt or selling the property.
With many borrowers struggling to repay their loans, interest-only mortgages are now much less common. Fewer lenders offer them and the eligibility criteria is very strict – you are likely to need a deposit of at least 40% or have a very high income.
They are more common in the buy to let market as landlords will be more willing to sell the property to repay the mortgage.
What types of repayment mortgages are there?
You can get all types of repayment mortgage, including:
- Standard Variable Rate (SVR) Mortgage – where the interest rate is set by your lender.
- Discount mortgages – the interest rate is set at the lender’s standard variable rate (SVR) with a set percentage discounted.
- Fixed-rate mortgages – your interest rate is set for the length of a certain period, usually one, two, five or 10 years.
- Guarantor mortgages – where a relative or friend promises to repay the loan if you fail to do so.
- Offset mortgages – you put your savings into a linked account and the balance of that account is deducted from what you owe on your mortgage when the interest is calculated, making your mortgage cheaper.
Tracker mortgages – your interest rate tracks an external interest rate, usually the Bank of England base rate, plus a fixed percentage.
How to compare repayment mortgages
The simplest way to compare repayment mortgages is via a comparison site. This will usually show you the mortgages in order starting with the lowest interest rate. Getting a mortgage with a low interest rate can keep your mortgage costs down, but you also need to factor in the fees and charges that come with the mortgage.
These days it is increasingly common for a table-topping mortgage with a low interest rate to have a sting in its tail in the form of hefty application or product fees. Make sure you check the fees and factor these into the overall cost of the mortgage. Sometimes a big fee can actually make a low-rate more expensive than a mortgage with a higher interest rate but a lower fee.
With so many products available it usually makes sense to think about what type of mortgage you want before you start your search. For example, do you want a variable rate or a fixed rate or do you want your initial deal to last just two years or as long as five?
>>MORE: Variable vs Fixed Rate Mortgages
Compare repayment mortgages today
If you are finding the process of choosing the right mortgage a little overwhelming a mortgage broker can help. Their knowledge of the market means they can help you find a mortgage to suit your needs. They can also improve your chances of being approved as they will know which lender is mostly likely to accept your application. Find out more with our guide to mortgage brokers.
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Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property. Read more