Capital and interest, or Repayment mortgages as they are better known, are the main choice of lenders and clients as the vehicle to repay their mortgage over the agreed term.
Lenders prefer repayment mortgages as they feel more comfortable knowing that the debt will be repaid within the agreed time frame, and as the debt level decreases the risk to the lender will also lower. All lenders would prefer low risk mortgages and offer at outset more attractive terms for a lower loan to value mortgage from day one.
All lenders carry out an annual review to see the risk level that they are carrying, and may if need be look to rebalance the portfolio if they are unhappy with the risk level.
I think that we can say that all clients who have a repayment mortgage look forward to receiving their annual statement at the beginning of each year to see what they now have out standing on their mortgage, and look forward to the day when it comes back with a nil balance.
The very positive nature of a repayment mortgage is what clients find attractive, and the illustration produced by a mortgage broker or a lender when clients enquire about a mortgage will show them what they would expect to repay on the capital balance each year. We all know that we will have to retire at some stage in our life and a repayment mortgage can be geared to make sure that you will repay your mortgage prior to your retirement. This very fact gives clients the confidence going forward that they can retire with no mortgage to worry about, and will no doubt have been monitoring the reducing balance each year to make sure that they were on target to repay the debt on time.
With most mortgage lenders clients can overpay on their mortgage by up to 10% of the outstanding debt without penalty. This again helps clients to have that peace of mind that they are repaying their mortgage on or before retirement. The overpayment could be by a lump sum or by making a separate monthly repayment.
One of the other benefits for clients who have a capital and interest mortgage is that if a client has a period when they are struggling financially because of an unexpected event in their lives, most lenders would agree to a period when they could make an interest only payment to the lender to help them recover their financial security.
Capital and Interest mortgages are what it says on the tin. You repay each month some capital and some of the interest, with each repayment that you make. In the early years of a 25 year mortgage most of the monthly repayment would be interest. It would not be until around year ten that you would start to see the capital reducing by sizeable amounts.
As all lenders without exception base their decision to lend or not, on the clients passing their affordability criteria, it would in nearly all cases be in the clients interest to go for the longest mortgage term that was available to make sure that the application meets the affordability criteria, and then use the option of overpayment to reduce the mortgage term.
Longer term mortgages cost less per month because the repayments are spread over a longer term. However, you pay more overall because you are charged more interest over a longer term.
Shorter term mortgages cost more each month but let you pay the balance off quicker. This means you own your home outright much sooner and pay less in total because less interest is charged.
What are the strong points regarding a repayment mortgage
Negative points regarding a repayment mortgage
NONE
The amount of capital you repay in each year will depend upon how the interest is calculated, which could be anything ranging between daily and annually. If you are having your interest calculated on a daily basis you would be repaying far less interest over the mortgage term and you should try and look for this type of repayments. You can also vary the amount of capital you repay with the agreement of the lender by structuring only a part of your total mortgage to be on capital and interest and the balance on interest only. This will of course lower your monthly repayment to make it more affordable and you can change the spilt over the mortgage term as your income increases.
The truth is that when the clients should have put more money into the investment plan to make up any projected shortfall they ignored the advice and now we have a number of clients who will have to make other arrangements to repay any shortfall.
Capital and Interest mortgages are what it says on the tin. You repay each month some capital and some of the interest, with each repayment that you make. In the early years of a 25 year mortgage most of the monthly repayment would be interest. It would not be until around year ten that you would start to see the capital reducing by sizeable amounts.
If we go back 10/15 years most mortgages would have had interest calculated on an annual basis in arrears. This has gradually changed towards interest calculated monthly, or daily in some cases, whereby you will see the capital element reducing a great deal quicker.
A capital and interest, or repayment mortgage as it is more commonly known, is the safe option, but does take away some of your personal choice on how you may wish to repay your mortgage
If you would like to know more why not call A Mortgage 4 You today, we are here to help you, and with over 40 years of experience in financial services, with access to the whole of the market as Independent Mortgage Advisers, we are ideally placed to be find the right product to suit your personal requirements.
The amount of capital you repay in each year will depend upon how the interest is calculated, which could be anything ranging between daily and annually. If you are having your interest calculated on a daily basis you would be repaying far less interest over the mortgage term and you should try and look for this type of repayments. You can also vary the amount of capital you repay with the agreement of the lender by structuring only a part of your total mortgage to be on capital and interest and the balance on interest only. This will of course lower your monthly repayment to make it more affordable and you can change the spilt over the mortgage term as your income increases.
A Mortgage 4 You are an established brokerage based near Biggleswade. We can help with a whole range of mortgage products including capital & interest (repayment mortgages).
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