Everything You Need to Know About Capital Repayment Mortgages
Understand the basics of a capital repayment mortgage and how it can help you make one of life's biggest investments.
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Buying a home is one of the most significant investments one can make in life. As a home buyer, it's crucial to understand the different types of mortgages available to choose the most suitable one for you. One type of mortgage is a capital repayment mortgage. In this guide, we'll explore everything you need to know about capital repayment mortgages to help you make an informed decision.
What is a capital repayment mortgage?
A capital repayment mortgage is a type of mortgage in which you repay the loan in full over a fixed period. The monthly payments you make each month not only cover the interest on the loan but also a portion of the principal. This means that with each payment you make, you pay off a bit of your mortgage, and the amount you owe slowly decreases.
How does a capital repayment mortgage work?
In a capital repayment mortgage, each monthly repayment amount is used to pay both the interest and a portion of the principal amount borrowed. Over time, the outstanding mortgage balance reduces, and as the interest payments are based on the current outstanding mortgage balance, the interest payments gradually reduce too. The final monthly repayment will completely pay off the principal and any remaining interest.
One of the major benefits of a capital repayment mortgage is that it ensures that you own your property outright at the end of the mortgage term. This makes it an excellent option for those who want to build equity in their home and have the security of owning their property outright. Additionally, because you are reducing the amount you owe with each payment, the amount of interest you pay over the life of the loan will decrease as well.
Another benefit of a capital repayment mortgage is that your monthly payments remain the same throughout the mortgage term. This can be helpful for those who want to budget and plan their finances with certainty, as they will know exactly how much they need to pay each month.
However, there are also some cons to consider when it comes to a capital repayment mortgage. Because you are paying off the principal with each payment, the monthly payments tend to be higher than those of an interest-only mortgage. Additionally, because you are paying off the principal, the amount of interest you can deduct from your taxes is lower, which can be a disadvantage for some.
Another disadvantage of a capital repayment mortgage is that the initial payments tend to be higher than those of an interest-only mortgage. This means that it can be more challenging to qualify for a capital repayment mortgage, particularly if you are on a lower income.
Lastly, it is essential to consider the impact of interest rates on a capital repayment mortgage. If interest rates rise, your monthly payments will also rise, which can make it more challenging to make ends meet. However, if interest rates fall, your payments will also decrease, making it easier to manage your finances.
What are the advantages of a capital repayment mortgage?
The primary advantage of a capital repayment mortgage is that you're guaranteed to repay the mortgage balance at the end of the mortgage term, provided you stick to the repayment schedule. This gives you peace of mind. Additionally, as you're repaying the principal monthly, the interest payments reduce on the outstanding balance, meaning you pay less interest overall.
- Consistency
One of the biggest benefits of a capital repayment mortgage is that your monthly payments will remain consistent throughout the term of the mortgage. This is because you are repaying both the interest and the capital amount of the mortgage each month. This makes it easier to budget and plan your finances, as you will know exactly how much you need to pay each month.
- Guaranteed Ownership
With a capital repayment mortgage, you will own the property outright once you have made all of the payments. This means that you will have complete control over the property, and you will not need to worry about any further mortgage payments. This is in contrast to other types of mortgages, such as interest-only mortgages, where you will still owe the capital amount at the end of the mortgage term.
- Reduced Interest Payments
With a capital repayment mortgage, you will pay less interest over the term of the mortgage. This is because you are reducing the amount of capital owed each month, which means that there is less capital for interest to be charged on. This can save you a significant amount of money over the term of the mortgage.
- Less Risky
Capital repayment mortgages are considered to be less risky than other types of mortgages, such as interest-only mortgages. This is because you are paying off both the capital and the interest each month, which means that you are reducing the risk of negative equity. This is when the value of the property falls below the amount owed on the mortgage.
- Builds Equity
With a capital repayment mortgage, you are building equity in the property each month. This means that as you pay off more of the mortgage, the value of the property that you own increases. This is because the equity in the property is the difference between the current value and the amount owed on the mortgage. This can be an important consideration if you plan to sell the property in the future.
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What are the disadvantages of a capital repayment mortgage?
As you repay both the principal and the interest monthly, your monthly repayments will be higher than with an interest-only mortgage. This can make it harder for you to qualify for the mortgage amount you wish to borrow. Additionally, you may not have the flexibility to reduce some of the monthly repayments if you encounter financial difficulties.
The primary concept behind a capital repayment mortgage is that you'll be paying off both the interest and a fraction of the mortgage's capital with each monthly payment. Over time, that ratio shifts to where you'll eventually pay off the full amount borrowed, leading to full mortgage repayment at the end of the mortgage term. One of the biggest drawbacks to a capital repayment mortgage is the monthly repayments. They tend to be much higher than other types of mortgages, such as interest-only, which only require monthly payments on the interest. Many borrowers struggle with the significant monthly payments of a capital repayment mortgage, and it can often put them under considerable financial pressure.
The second issue with a capital repayment mortgage is the cost. Over the mortgage's term, you will end up paying significantly more money back than you initially borrowed, mainly because you're paying interest over a more extended period. Depending on the mortgage's duration, it's not uncommon to see interest costs exceed the amount that you initially borrowed. For people on tight budgets, this can be a severe financial challenge, and you may find yourself in a situation where you're struggling to make ends meet even with your high monthly repayments.
Another disadvantage of a capital repayment mortgage is the lack of flexibility. Once you've agreed on a specific repayment schedule, it can prove challenging to negotiate different terms later on. This issue is one that can be especially costly in unexpected circumstances, such as job loss, where your financial situation changes. The fixed nature of capital repayment mortgages means that they can be restrictive and ultimately result in your finances being put under even more pressure.
Finally, it's crucial to consider that the interest payments on a capital repayment mortgage don't remain the same over the mortgage's entire term. As interest rates rise and fall, so do the monthly payments required to service the mortgage. Therefore, borrowers need to be prepared to recalibrate their budgets to account for potential increases in monthly payments.
Are there any alternatives to capital repayment mortgages?
Firstly, let’s look at discount mortgages. A discount mortgage offers a discount off your lender’s standard variable rate (SVR) for a certain period of time, after which you will switch to the SVR. This means that your monthly payments will be less than they would be on a capital repayment mortgage. However, it’s important to note that discount mortgages can come with product fees, and the interest rate could rise after the discount period ends.
Now, let’s discuss the alternatives to capital repayment mortgages. One potential option is an interest-only mortgage, which enables you to make monthly payments towards the interest on the loan, without having to pay anything towards the capital. However, it’s important to note that you will need to have an investment vehicle in place to pay off the capital at the end of the term. Another alternative is a part-and-part mortgage, which allows you to split your mortgage between a repayment portion and an interest-only portion. This means that you can pay off some of the capital, whilst also making more affordable monthly payments towards the interest.
It’s important to consider the pros and cons of each option. For example, a capital repayment mortgage means that you will steadily be reducing the amount you owe over time, meaning you will pay less interest in the long run. However, it will also mean higher monthly payments. Discount mortgages can be more affordable, but the interest rate can rise after the discount period ends, and there may be product fees to pay. Interest-only mortgages can offer shorter-term affordability, but you will need to have a solid investment plan in place to pay off the capital at the end of the term.
Capital repayment mortgages vs interest-only mortgages
When it comes to comparing capital repayment mortgages and interest-only mortgages, there are some key differences. Firstly, a capital repayment mortgage requires regular monthly payments towards the capital as well as the interest on the loan. This means that over time you will steadily reduce the amount you owe on your mortgage.
Capital Repayment Mortgages:
Capital repayment mortgages are considered the traditional type of mortgage. With this mortgage, you would make monthly payments to the lender, including both the interest and part of the capital. Each payment reduces the outstanding mortgage balance, and at the end of the mortgage term, you would have paid off the total amount borrowed, including the interest.
Pros:
- At the end of the mortgage term, you would own your home outright, giving you peace of mind and security.
- Over time, the interest payments decrease, and the amount paid towards capital increases, leading to substantial savings.
Cons:
- Your monthly mortgage payments are generally higher than an interest-only mortgage.
- If you have a fixed-rate mortgage, you can't reduce your payments if interest rates decrease.
Interest-Only Mortgages:
An interest-only mortgage means that you would only pay the interest on the mortgage for a specified period. At the end of the mortgage term, you would still owe the full amount borrowed, and you would need to have a savings plan in place to repay the total amount.
Pros:
- Monthly mortgage payments tend to be lower than capital repayment mortgages.
- Flexibility to reduce your monthly payments in the short term.
Cons:
- You wouldn't own your home outright at the end of the mortgage term.
- Your monthly mortgage payments would increase significantly when you need to start paying your capital back.
Consider Both Types of Mortgages:
The type of mortgage you choose depends on your financial circumstances and future plans. You may be better suited to a capital repayment mortgage if you want to own the property outright at the end of the mortgage term. However, if you're looking for lower monthly payments, an interest-only mortgage could be the way to go.
Other types of repayment mortgages
Fixed-Rate Mortgages
A fixed-rate mortgage is a type of mortgage that has a fixed interest rate for an agreed period, usually two to five years. This means that your monthly payments stay the same regardless of any changes in the Bank of England base rate. The main advantage of a fixed-rate mortgage is that it provides certainty and stability when it comes to budgeting. On the downside, fixed-rate mortgages can be more expensive than other types of mortgages, and you may miss out on any savings if interest rates fall.
Tracker Mortgages
Tracker mortgages are variable-rate mortgages in which the interest rate is fixed at a set percentage above the Bank of England base rate. This means that your mortgage payments will go up or down whenever there is a change in the base rate. Tracker mortgages usually have lower rates than fixed-rate mortgages, making them a more affordable option. However, they can be risky because you could end up paying more if interest rates rise.
Offset Mortgages
Offset mortgages are a type of flexible mortgage that allows you to offset your savings against your outstanding mortgage balance. This means that your savings earn interest tax-free and reduce the amount of mortgage interest you have to pay. Offset mortgages are a good option for people with large savings who want to reduce the amount of interest they pay on their mortgages. However, the interest rates for offset mortgages can be higher than for other types of mortgages.
Guarantor Mortgages
A guarantor mortgage is a type of mortgage that requires a family member or friend to act as a guarantor for the loan. This means that if you are unable to make the mortgage payments, your guarantor will be liable for them. Guarantor mortgages are a good option for first-time buyers or people with a poor credit score who may find it difficult to secure a mortgage. However, being a guarantor comes with a lot of responsibility and risks, so it's important to weigh up the pros and cons carefully.
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Is a capital repayment mortgage the same as a repayment mortgage?
One common question that people ask is whether a capital repayment mortgage is the same as a repayment mortgage. The simple answer is no, they are not the same. In this blog, we will take a closer look at the differences between these two types of mortgages so that you can make an informed decision about which one is right for you.
Repayment Mortgage:
A repayment mortgage is the most conventional type of mortgage in which you borrow money from a lender, and you repay the loan amount plus interest over a set period of time, typically 25 or 30 years. Each month, you make regular payments to your lender, which is a combination of capital and interest. Gradually, your outstanding mortgage balance decreases, and you eventually pay off the loan by the end of the term. In this type of mortgage, you don't need to worry about paying a lump sum at the end of the term and can rest assured that you own your property outright.
Capital Repayment Mortgage:
A capital repayment mortgage is slightly different from a repayment mortgage because in this type, your monthly payments go towards paying off the capital (the amount borrowed) as well as the interest. This means that each payment you make gradually reduces the outstanding balance of the mortgage. Similar to a repayment mortgage, you do not need to worry about a balloon payment at the end of the term, and once you pay off your mortgage, you will own your property.
Let's calculate your repayments using our repayment calculator
With so many different options available, it’s hard to know which one is right for you. This is where our mortgage repayment calculator comes in. By simply inputting a few key details, you can get an idea of how much your monthly repayments will be.
How to Use Our Repayment Calculator
Using our repayment calculator couldn’t be easier. Simply input the following details:
- How much do you want to borrow
- The interest rate
- The length of the repayment term
Once you’ve inputted these details, the calculator will work its magic. You’ll then be presented with an estimated monthly repayment figure. This figure is based on the information you’ve entered, so it’s important to ensure that everything is correct.
Using a repayment calculator is important for several reasons. Firstly, it allows you to accurately budget for your monthly repayments. By knowing how much you’ll have to pay each month, you can ensure that you have enough money to cover your mortgage payments.
Secondly, it allows you to compare different mortgage options. By inputting different interest rates and repayment terms, you can see how much your monthly repayments would be for each option. This can help you to make an informed decision when it comes to choosing the right mortgage for you.
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Conclusion:
Who said purchasing a property has to be complicated? Arm yourself with the right knowledge and you’ll have no trouble at all! Hopefully, this guide has helped you understand capital repayment mortgages better so that you can make more informed decisions on the mortgage repayment choice that works best for you. Here’s to your journey toward home ownership! As a last piece of advice, if you think a capital repayment mortgage is the right fit for your needs and budget, then don’t miss out on any available opportunities. Reach out to us so we can provide you with further assistance in your home-buying endeavour's!