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As long as all the repayments are made on time, repayment mortgages are guaranteed to be repaid at the end of the term. Repayment mortgages are also known as “capital and interest mortgages.”
During the term of the loan the monthly payments made to the lender comprise both an interest portion and a capital repayment portion. At the beginning of the term the interest portion is high and the capital portion low. Over time the interest portion diminishes and the amount of capital repaid increases. At the end of the term of the home loan, the capital portion should be fully repaid.
Repayment mortgages are less risky than interest only mortgages because there will be no outstanding balance at the end of the term. Borrowers will therefore not be required to establish a separate Capital Repayment Vehicle (CRV) such as an endowment policy. Home owners with repayment mortgages are also less likely to suffer from negative equity because they will be constantly decreasing the capital portion of their loan.
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