What is a repayment mortgage ?

Posted by admin On December 23rd 2020

With a repayment mortgage, the borrower makes monthly repayments to the lender, which consists partly of capital repayment (the original amount borrowed) and partly of interest on the total amount borrowed. The higher the interest rate (for any given mortgage amount and term) the higher that monthly repayment will be.

The repayment is calculated so that it is evenly spread throughout the whole term of the mortgage. Therefore, if interest rates do not change over the term, the repayment will stay the same each month. However, if interest rates do increase or decrease, then the monthly repayment increases or decreases correspondingly, or there is the option to extend or shorten the mortgage term appropriately.

Proportions of capital and interest do vary throughout the term. At the start, when most of the original amount borrowed is outstanding, most of the monthly repayment is only paying the interest on the loan. Later on, when more of the capital has been repaid, the interest proportion of the repayment reduces and a larger segment of the repayment goes towards repaying the capital.

Providing that all the repayments have been made on time, and that repayments have been adjusted accordingly to changes in the interest rate, the mortgage will be repaid in full at the end of the term.

If the borrower passes away before the end of the mortgage term, there are two options: either repayments must still be made, or the loan has to be repaid in full. The borrower needs to ensure they take out life assurance cover to make sure these conditions can be met.