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Mortgages - Mortgage Repayments


These are also referred to as capital and interest mortgages, with a repayment mortgage your payments are the same each month. It mortgage has two elements, the interest payment, and the loan payment. These amounts constantly recalculated.

At the start the interest element is a huge amount, and the actual loan payment will be smaller, this is because you still owe almost your entire mortgage, as the years follow, you will pay more and more of your mortgage off, therefore the amount of interest per payment will slowly decrease, allowing more of the payment to go towards the loan itself. Here’s an example:

On a mortgage of £50,000 at 6% interest based over 25 years. The payments are £325.94 a month.

In the first year total payment would be £3,911.34 (325.94 x 12). Of the two elements mentioned above, Interest and Loan payment, £3,000.00 is interest payment, and only £911.34 pays off the loan.

In the second year the total payment would be the same, but the interest is reduced to £2,760.80 and the payment of the loan, or the “capital” would be £966.02.

By year 5 the interest is only £2,760.80 and the "capital" is £1,150.54, and in year 10, its £2,371.65 capital and £1,539.68 interest.

After year 10 the interest falls at an increasingly faster rate, so the loan payment (“capital”) also increases, meaning that the loan is accelerating towards zero. By year 20 the interest will only be £1,154.00 as opposed to year 1 in which is was £3,000.00.

At the end of year 25, the loan is zero and you finally own your house.

Advantages & Disadvantages
Advantages
  • Guaranteed repayment of loan at end of period.
  • More and more capital is repaid as the period advances.
  • Because it is not linked to investment products with a finite term, restructuring the loan on a different basis e.g. longer term is more easily accomplished.
Disadvantages
  • The whole process must be repeated, and a new repayment term started, with each house move.
  • The terms of the loan may be varied at the discretion of the lender.
  • There is no surplus cash at the end of the term.
  • Separate life assurance is required to cover the loan.
  • There is no investment product to produce 'excess' growth, so there is no chance of early repayment except by injection of an outside source of capital.


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