What Are Repayment Mortgages?

A repayment mortgage, also known as a capital repayment mortgage, is a type of mortgage where you’re paying off both the capital and the interest of your mortgage in the same monthly payment. This is typically the most straightforward and popular method available to pay off a whole loan.

One of the main reasons this is such a popular method is because it addresses the capital and interest, meaning on completion of the mortgage term you will own the property outright. In the early stages of your loan, the percentage of your repayments dedicated toward the interest payments will be higher, but will decline over time — a typical repayment mortgage term being 25 to 30 years.

But what are the different types of repayment mortgages available? And what are the differences between this, and other popular choices? When the Bank Says No are expert mortgage brokers with the know-how about these types of mortgages and can advise you on what the best choice for your mortgage is. Read on to find out more.

Repayment Mortgages vs Interest Only Mortgages

Repayment mortgages and interest-only mortgages are often pitted against each other for comparison. The following will be a breakdown of both, pitting their pros and cons against one another and determining which is more suitable for who.

Repayment mortgages

The following is break down of the repayment mortgages:

• 100% Debt Reduction – The overall length of the plan is calculated and laid out to ensure that the entire debt will be repaid by the end of the term.
• Building Equity – Property equity increases as the loan balance decreases, meaning you have a larger portion of homeownership each month. The higher the equity, the better off you are overall.
• Financial Security – This mortgage term allows the owner to make good progress on paying both the debt and the interest charged. The longer you pay, the lower the interest, which is effectively the cost of borrowing – as interest is calculated by multiplying a percentage against the principle.
• No Final Payment – Some mortgage formats require for a large, lump sum as a final payment to finalise the mortgage – however, the even, measured monthly payments don’t require this, as it’s designed to pay off the entire mortgage by the end of the term.

Overall, we believe this mortgage term option is ideal for most first-time buyers. It offers an even, straightforward path that will cause the least destabilisation to your security. It’s also especially good for those who dislike financial risks, ensuring their debt is consistently paid off efficiently.

Interest-only mortgage

Interest-only mortgages are as the name implies, you pay just the interest and nothing on the principal amount borrowed. The following are the advantages:

• Lower Monthly Payments – Initially, the monthly payments that an interest-only mortgage mandates are significantly lower. This is because you’re paying the interest rates only, not the principal, good for managing cash flow in the short term.
• Flexibility – By paying interest only, you free up cash that can be allocated elsewhere. This could yield higher returns in the long run if used effectively, such as in investments or paying off other debts. Furthermore, it’s also completely valid to stay on an interest-only mortgage until you’re ready to make the switch to a repayment mortgage.
• Short-term affordability – If you need a mortgage term but don’t have the money to make the larger monthly repayments of a repayment mortgage, an interest-only mortgage may appeal to you.

Overall, the people who opt for an interest-only mortgage are often those who are usually investing. For example, buy-to-let landlords who are renovating the property to rent, pay off the principal with rent income. Typically, those who take this term from mortgage lenders usually have a plan in place down the line to pay off the principal in large amounts or to simply make a change to repay mortgages.

What are the different types of repayment mortgages?

Whilst repayment mortgages are some of the simpler types of mortgage, there are still variants regarding the types of repayment to suit different types of borrowers.

Fixed Rate Repayment Mortgage

A fixed-rate mortgage term refers to the interest rate, which is slotted at a set percentage for several years (usually 2-10). The monthly payments are predictable in this case, providing stability and making it much easier to budget.

 Interest rates are known to increase over time if the principle is not reduced to a sufficient standard, but you have a guarantee against this happening for as long as the contract stipulates.That being said, the rate that is fixed may be higher than the initial amount that variable rates would demand.

Variable-rate repayment mortgage

Variable-rate mortgages are typically influenced by the lender’s standard variable rate, or other benchmarks (like the Bank of England’s base rate). The fluctuations could result in interest rates dropping over time alongside the principle. Those who go with variable-rate mortgage repayments experience immediate savings in contrast to fixed-rate mortgages.

Variable rates come with fewer restrictions on overpayments, meaning you can pay off your mortgage faster without feeling the threat of large early repayment charges. People who expect a windfall can take advantage of this, reducing principal, debt and interest payments by extension.

Tracker repayment mortgage

Tracker mortgages are a type of variable rate mortgage in which the interest rate is linked to a specific benchmark, such as the Bank of England’s base rate, plus a percentage. The rate will move in line with this base rate, making it fairly easy to track, as the name implies. If the base rate is low, then your monthly payments will be lower than average too.

Sometimes the tracking periods are short-term, and they could revert to another base rate that could be higher. It’s important to consult and ensure you’re clear on the terms and possibilities.

Discounted variable-rate repayment mortgage

A discounted variable-rate mortgage calculates interest based on the lender’s standard variable rate – only at a discounted rate. This allows for lower initial monthly repayments, making it highly affordable at the start. Discounted mortgages allow for overpayments and early repayments with lower or no charges.

Capped-rate repayment mortgage

A capped-rate mortgage is a variable-rate mortgage with an interest rate that cannot go above a certain cap. This means that you’re protected against significant interest rate increases whilst still being able to experience interest rate drops. That being said, these mortgages typically come with higher initial rates due to this added protection, and they are much less common than other variants.

Offset repayment mortgage

An offset mortgage links your mortgage account with your savings and, in some cases, your current account. The balance of the savings is offset against your mortgage and savings balance, potentially earning you massive savings over time. Payments are flexible, including overpayments or payment holidays.

Flexible Repayment Mortgage

A flexible repayment mortgage allows you to overpay, underpay and take payment holidays. You can adjust your payments to suit your financial situation, with a high potential to pay off the mortgage early. Of course, this mortgage term is risky for mortgage lenders as the flexibility is a double-edged sword. Without proper planning and discipline, you may find that you fail to pay enough back, which may extend the mortgage term and overall cost.

Mortgage Calculations – how they work

The rules behind mortgage calculations are as follows:

Rules aside, making the actual calculation with figures is best done with our very own mortgage repayment calculator.