How taking out a Repayment Mortgage will affect you.
With a repayment mortgage you are repaying the loan instalments, along with interest being charged for borrowing the money, so that at the end of the term you have paid off the mortgage in full. It provides certainty that the property will be yours outright providing all instalments were been made in full.
The payments you have to make every month are designed to be the same throughout the term but are subject to changes in interest rate, which will affect the amount of the monthly payment.
How much you pay each month depends on the amount you have borrowed, the interest rate and the length of the mortgage.
The longer the period of the mortgage, the longer there is to pay off the capital, so the smaller the monthly repayments. However, borrowing the money over a longer period adds to the overall debt as you are paying interest for longer.
Depending on the mortgage product selected there may be nothing stopping you increasing your mandatory mortgage payment to pay off the debt more quickly.
In the early years of a repayment mortgage, most of each payment you make goes to pay the interest on the money you have borrowed, and only a very small portion goes towards paying off the capital. But as the years go by, the capital you owe reduces and so the proportion of interest in each payment goes down and the proportion that is paying the capital goes up – until in the last few years only a very small part of each payment is interest.
In it very common for repayment mortgages to be used for residential purchases so that your home is owned outright at the end of the term. In fact most mortgage lenders want this method used if you are buying with a deposit that is less than twenty-five percent.
The selection of repayment mortgages for Buy-to-let mortgages is more down to your personal investment strategy. If repayment is taken, the asset is owned mortgage free at the term end then the rental yield will be greater and it makes it easier to pass the property down to your family. However, an interest only mortgage will allow you to enjoy more income throughout the term as the monthly mortgage payment will be lower.
I have also recently written about Interest Only Mortgages so it’s worth reading so you get get the full predict around your options.