Repayment Mortgages

When most people think of a mortgage, they think of a repayment mortgage. Repayment mortgages are the mortgages that allow you to own your home completely when you are done with the loan term. Any other type of loan repayment plan will leave you with a bill when you are done with the loan term.

How Repayment Mortgages Work

If you choose a repayment mortgage for your next home loan, you will receive a monthly bill. Each time you pay the bill, a portion of the money goes towards the interest portion of your loan, and a portion of the money goes towards the capital. At the beginning of the loan agreement, you will be paying most of your money towards interest with just a little bit going towards capital. This gradually shifts until you are paying the most towards capital and just a little towards interest at the end of the loan. When the loan is paid in full, you will have paid all of the capital, allowing you to own your home completely.

Repayment Mortgages Compared to Interest-Only Mortgages

Interest-only mortgages are the main alternative you have to repayment mortgages. Choosing a mortgage option will depend on your short-term and long-term goals. Both options have benefits and drawbacks.

With repayment mortgages you will own your home when you are done with the loan. Also, each time you pay your bill, you will be paying a portion of the capital. If you have an emergency, you can access this capital with a personal loan. However, your monthly payments will be higher with a repayment mortgage than with an interest-only mortgage since you are paying both capital and interest.

Interest-only mortgages have lower monthly payments than repayment mortgages, because all you will be paying is the interest. However, you will have to repay the capital portion of your loan when it comes to term. Unless you make extra payments towards your mortgage, you will end up with a huge bill at the end of the mortgage term. The only way to make this work is to have some type of savings in mind to help you pay down the capital.

So which one is right for you? If you need a home now and cannot afford larger payments in the short-term, you might be able to benefit from a temporary interest-only loan. However, if you can afford the larger payments, repayment mortgages are a far safer choice, and they will give you more when you are done paying the loan.