UK Repayment Mortgage Guide

With a repayment mortgage you don't just pay back the interest on the loan each month - you pay back part of the capital as well. At the end of the year you get your annual mortgage statement which will show that the total amount owing is less than the previous year.

There is one very obvious benefit of a repayment mortgage. That is, at the end of your mortgage term, you know you will have paid all of the debt - interest and the capital. You don't need to have an investment in place with its risks of fluctuation. Negative equity is less likely to affect you as the balance of your mortgage will be reducing each month.

As the amount of capital paid back increases, the amount of equity you have in your property will also increase (this assumes your home hasn't dropped in value). If you ever need to remortgage you will certainly find it easier with a higher level of equity. When you move home you may find it easier to secure another mortgage even if for a higher amount.

There are one or two disadvantages. If the stockmarket performed well during the term of your mortgage, you would reap no benefit from this, unlike someone on an endowment mortgage. The chances of paying off the mortgage early with stockmarket profits are nil. You will also not have any chance of receiving a tidy lump sum at the end of the mortgage term.

The monthly payments at the beginning of a repayment mortgage term consist mostly of interest. It is not until the later years that the capital repayment portion becomes significant. So let's say you move house after a few years of taking out the mortgage, and need to take out a new loan. You won't have paid much of the capital and effectively will be starting again with another 25 yr mortgage.

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