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    A capital repayment mortgage is a method to pay off a mortgage through regular payments, typically on a monthly basis, that gradually decrease the total loan amount over the mortgage’s term.

    When you secure a mortgage, you’re obligated to pay back both the capital and the interest. The most widely chosen mortgage method is the capital repayment mortgage, where you consistently make payments to reduce the loan amount over time.

    Understanding a repayment mortgage is crucial if you’re considering one. Ensure you’re eligible and thoroughly research to find a suitable and cost-effective deal.

    What is a Capital Repayment Mortgage?

    A capital repayment mortgage is a standard and popular mortgage type where you make mortgage repayments over a set period (the ‘term’) until both the capital (the borrowed amount) and the interest are fully repaid. This structure ensures that with each payment, you’re reducing the capital and covering the interest, leading to complete mortgage loan repayment by the end of the term. This mortgage type is popular due to its straightforward pathway to full property ownership.

    Repayment mortgages often have a duration of 5 to 40 years, with a common choice being a 25-year term. In 2023 the average mortgage term taken by customers at YesCanDo Money was 27 years.

    Initially, a larger portion of your repayment covers interest rather than capital. However, as the loan balance reduces, the interest component decreases, and more of your payment goes towards the capital.

    How Does a Capital Repayment Mortgage Work?

    At the start, your payments primarily cover the loan’s interest, making it appear as if the capital isn’t reducing significantly.

    However, as time progresses and you continue making payments, the capital amount of the mortgage gradually decreases.

    Example of a Capital Repayment Mortgage

    Consider a 30-year repayment mortgage where you borrow £200,000 at a 5% interest rate. You’ll repay £186,512 in interest over the term.

    In the first year, you’d pay £9,933.28 in interest and £3,366.72 towards the capital. Your monthly repayment would be £1,073.64, covering both interest and capital. This amount stays constant unless you remortgage for a different rate or lender.

    This graph presents a comprehensive view of a mortgage’s progression. Over time, the portion of your payment towards the capital increases, while the interest portion decreases. The monthly repayment remains the same until the end of the term. It illustrates three key components for each year of the mortgage term:

    1. Mortgage Balance: This bar shows the remaining balance of the mortgage at the end of each year. It starts with the original loan amount and decreases annually as payments are made.
    2. Interest Paid Annually: This portion of the graph displays the amount of interest paid each year. Typically, this amount is higher in the early years of the mortgage and decreases over time as the balance is paid down.
    3. Capital Paid Annually: This shows the amount of the capital of the loan that is repaid each year. In contrast to interest, the capital paid increases as a percentage of each payment over the mortgage term.

    Together, these elements visually represent how much of the loan remains (the mortgage balance), how much of your annual payments are going towards interest, and how much is reducing the capital balance. This graph is useful for understanding how your payments are allocated between interest and capital over the life of the mortgage, and for seeing the progress in paying down the loan amount over time.

    Capital Repayment Mortgage vs. Interest-Only Mortgage

    In an interest-only mortgage, you only pay the interest during the term of the mortgage. The capital is paid at the end, usually from the sale of the property or savings.

    These are popular among investors and homeowners who prefer lower repayments each month. However, they pose a higher risk.

    Capital Repayment Mortgage vs. Interest-Only Example

    Using the same example as above which is based on a 30-year term and 5% interest rate, an interest-only mortgage would require repayments of £833.33 a month, but you’d still owe £200,000 at the end. Whilst with a repayment mortgage, your monthly payment would be £1,073.64, but you’d owe nothing at the end.

    Over 30 years, you’d pay £299,310.40 in interest with an interest-only mortgage, compared to £186,510.40 with a capital repayment mortgage.

    This graph illustrates that with an interest-only mortgage, the balance remains at £200,000 throughout the term, while with a repayment mortgage, the balance decreases each year, reaching zero at the end of the 30 years. ​This graph calculation is just an estimate and for educational purposes only. The actual mortgage payments may depend on factors like fees, insurance and taxes; for accurate advice it’s always advisable to speak to a financial advisor or mortgage specialist.

    Differences Between Capital Repayment and Interest-Only Mortgages

    Aspect Capital Repayment Mortgage Interest-Only Mortgage
    Monthly/Annual Repayment Covers Capital and interest, gradually reducing the mortgage balance. Only the interest on the loan; the principal remains unchanged.
    Balance at End of Term No outstanding balance if all repayments are made on time. The original loan amount is still owed at the end of the term.
    Interest Calculation Interest is calculated on the decreasing loan amount, reducing over time as the principal is paid. Interest is calculated on the full loan amount throughout the term, leading to higher total interest payments.
    Risks Risk of property repossession if repayments are not met. Consistent payments are crucial. Significant financial strain at the end of the term to repay the principal. There’s also the risk of property market fluctuations.
    Payment Stability Monthly payments are generally consistent, offering financial predictability. Lower initial payments, but the need for a substantial lump sum payment or refinancing at the term’s end.
    Equity Building Builds equity in the property over time as the principal is paid off. No equity is built until the principal is paid off, typically at the end of the term.
    Suitability Ideal for those planning long-term homeownership and steady reduction of debt. Often preferred by those seeking lower initial payments, investors, or those with a plan to pay off the principal at term’s end.
    Flexibility Limited flexibility in terms of payment reduction, but possible equity release through remortgaging. More cash flow flexibility during the term, but requires a solid plan for principal repayment.
    Total Cost Over Term Generally, a lower total cost due to decreasing interest payments. Higher total cost due to consistent interest payments on the full loan amount.

    Types of Repayment Mortgages

    Repayment mortgages come in different forms, each offering specific features and benefits. Options for repayment loans may include fixed-rate, tracker, offset, and guarantor mortgages – knowing their specific features can help make an informed decision that matches up best with your financial circumstances and goals. Let’s dive deeper into each type.

    Fixed-Rate Mortgages

    Fixed-rate mortgages offer the stability of a constant interest rate throughout the mortgage term. This setup ensures that your monthly payments remain unaffected by market rate fluctuations, providing predictability in your financial planning. Such mortgages are particularly appealing to borrowers who prioritise budget stability over the long term.

    However, while offering security against interest rate volatility, fixed-rate mortgages might initially have higher interest rates compared to variable-rate options. Additionally, borrowers may need to consider refinancing options in the future to benefit from potentially lower market rates.

    Tracker Mortgages

    Tracker mortgages are defined by their variable interest rates, which usually follow an external benchmark, like the Bank of England base rate, plus an additional percentage. This feature means your mortgage payments may vary as the base rate changes. When the base rate is low, tracker mortgages can offer the advantage of lower interest rates and smaller monthly payments.

    The downside to this mortgage type is the potential for increased payments if the base rate rises. This variability introduces a level of uncertainty in financial planning, making it challenging for some borrowers to manage their budgets effectively.

    Offset Mortgages

    Offset mortgages are innovative in that they connect a savings account to your mortgage. The savings balance is used to offset against the mortgage debt, reducing the interest charged. For example, if your mortgage is £200,000 and you have £20,000 in savings, you only pay interest on the net balance of £180,000. This setup can lead to significant savings on interest payments over the mortgage term.

    These mortgages are particularly beneficial for individuals with significant savings, as they offer a flexible way to reduce mortgage debt while retaining access to their savings. This flexibility is an attractive feature for those who want to make their savings work harder without losing liquidity.

    Guarantor Mortgages

    Guarantor mortgages involve a third party, typically a close family member, who guarantees the mortgage repayments. In this arrangement, the guarantor’s assets are at risk if the borrower fails to make repayments. This type of mortgage is often a viable solution for those who may not independently qualify for a mortgage, such as first-time buyers or individuals with limited credit history.

    The presence of a guarantor can provide additional security to the lender, enabling the borrower to access better mortgage terms or a higher loan amount. It’s a significant commitment for the guarantor, as they are essentially pledging their financial backing to the borrower’s ability to repay the mortgage.

    Is a Capital Repayment Mortgage Similar to a Repayment Mortgage?

    Indeed, the terms “capital repayment mortgage” and “repayment mortgage” are often used interchangeably. Both refer to mortgage structures where your monthly repayments are systematically allocated towards reducing both the capital (the original amount borrowed) and the accrued interest. This payment plan ensures that by the end of the mortgage term, the entire loan volume, including interest, is completely paid off.

    The specific structure of these payments can vary depending on the type of repayment mortgage chosen. For instance, with fixed-rate mortgages, the payment volume remains constant throughout the term, while in tracker or variable-rate mortgages, the payment amounts can fluctuate with changes in interest rates. Thus, the choice of mortgage type can significantly influence your monthly payment volume and the total amount of interest paid over the life of the loan.

    Repayment Mortgage Calculator: Working out your monthly repayments

    Using an online repayment mortgage calculator is a practical first step in estimating your monthly payments for a repayment mortgage. By inputting key details such as the loan amount, interest rate, and term, you’ll get an initial idea of your expected capital and interest repayments. These calculators are especially helpful for understanding the general structure and volume of your potential mortgage payments.

    Consulting a Mortgage Broker for Accuracy

    However, for an accurate and personalised analysis of your mortgage capital repayment needs, consulting with a mortgage broker is highly advised. A broker will take an in-depth look into your income, credit history, and long-term goals in order to offer more precise insights into what a repayment mortgage would entail; including details regarding interest rates, repayment terms, and the overall impact on your financial plan. Their expertise is crucial in deciphering the true meaning and implications of a capital repayment mortgage, providing clarity and confidence in your mortgage decision-making process.

    FAQs About Capital Repayment Mortgages

    The choice between capital repayment and interest-only mortgages depends on individual financial circumstances. Repayment mortgages gradually reduce both the loan's capital and interest, eventually leading to full ownership of the property. They're ideal for long-term stability and equity building. Interest-only mortgages require lower monthly repayments (covering just the interest) but leave the capital to be paid at the end, suitable for those expecting significant future income or planning to sell the property.

    No, capital repayment and overpayment are not the same. Capital repayment refers to the portion of your regular mortgage payment that goes toward paying down capital, while an overpayment occurs when paying more than is scheduled - potentially shortening the loan term and saving interest costs in the process.

    Repayment capital refers to the portion of your mortgage payment dedicated to paying down the capital. This refers to the actual loan amount you borrowed for purchasing property minus interest charges.

    Capital balance on a mortgage is the remaining amount of the capital (original loan amount) that has yet to be repaid. As you make regular mortgage payments, this balance decreases. The capital balance doesn’t include the interest or other fees associated with the mortgage.

    Capital repayment mortgages refer to paying both capital (the amount borrowed) and interest charged on that capital over time. With regular monthly repayments, this balance gradually reduces until finally being cleared at the end of your mortgage term.

    The key difference lies in repayment structure. In a payment mortgage, monthly repayments cover both interest and capital, leading to full loan repayment over time. An interest-only mortgage requires payments only on the interest, with the capital amount remaining unchanged and due at the end of the term.

    Repayment of capital refers to the process of paying back the original amount borrowed in a loan or mortgage, in contrast to paying interest, which refers to costs charged by mortgage lenders for borrowing money. Repaying capital reduces the outstanding capital balance.

    Capital repayment on a mortgage is calculated based on the loan's amortisation schedule. It's the part of each monthly payment that goes towards reducing the loan's capital. Initially, a larger portion of payments covers interest, but over time, more of each payment goes toward the capital as the interest on the reduced balance decreases.

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    Grant Humphries (CeMAP)
    Grant Humphries (CeMAP)

    Grant Humphries (CeMAP) is a proficient Mortgage & Protection Adviser at YesCanDo Money. With a career spanning since 2001, Grant has honed his expertise in understanding lenders' criteria, complex financial situations, and the nuances of the mortgage market. His deep knowledge enables him to provide tailored solutions, especially for professionals and those with unique financial profiles. At YesCanDo, Grant's commitment to excellence is evident. He takes pride in guiding clients through their mortgage journey, ensuring they feel confident and informed at every step. From first-time buyers to seasoned investors, Grant's analytical approach and dedication make him a trusted adviser in the financial landscape

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