Mortgage | Property Investment | Finance Guide

Repayment mortgage is a type of mortgage in which the monthly repayments consist of repaying the capital amount borrowed as well as the accrued interest. In your statement of mortgage which you receive annually indicates the amount borrowed decreases throughout the term.

The main advantage of a repayment mortgage is that at the end of the term, you can be sure that the total amount of the debt has been repaid. Secondly, it also removes the risk of having an investment, the performance of which is dependent on the stock market. Therefore, you are less likely to suffer from negative equity as your mortgage balance will be reducing month on month.

As time moves on, the equity percentage in the property increases. However, in the early years the bulk of the mortgage repayments consist of the interest component, so not much of the capital is actually paid off for some time. Consequently, when you re-mortgage or move home you may find it easier to obtain a mortgage and you may be able to avoid paying a Mortgage Indemnity Guarantee.
There are some disadvantages in repayment mortgage method, ie. you would be unable to benefit from the stock market if it has performed well over the period of the mortgage. Therefore, there is no possibility of being able to pay off your mortgage early with such an investment windfall or receiving an additional lump sum at the end of the repayment period.

If you think of moving house after a few years, then you may have to repay your existing loan and take out a new one, as most of the repayments in the early years consist of interest on the existing balance and not a huge amount of capital will have to be repaid from the original debt.

Many people end up taking out another twenty-five year loan, especially if they are trading up to a higher value property. This will once again put them at the start of the repayment schedule, meaning that the bulk of the repayments are once again being taken up with servicing the interest bill on the mortgage debt.