Understanding How Mortgage Repayment Options Work

Repaying your mortgage is a challenge – you are hooked up for 20 or 30 years and you need to stick to those payments no matter what. You have no idea what is going to happen tomorrow, so things can get pretty confusing overtime. All in all, a bit of education on your mortgage repayment options will work wonders in the long run. So, what kind of options do you have?

Understanding the concepts of capital and interest

A mortgage consists of two parts. It is basically a secured loan, meaning it is secured against the property. You fail to make your payments and the lender will grab the property and sell it. Now, these two parts represent the actual capital, which is the money you borrow, and the interest. The interest is a charge given by the lender for offering you money. It applies to the amount of money you owe.

Most people stick to the repayment mortgage, meaning they pay the interest and capital at once. Then, you also have an interest only mortgage option, which means you start with the interest – the capital will be paid later on, towards the end of the deal.

How the repayment mortgage works

The repayment mortgage is the most common deal out there – most people stick to it. Most banks will sell this product as their primary mortgage option. You will make monthly payments for a specific term – it could be 15 years or perhaps 30 years. Both the capital and the interest will go hand in hand, so you pay everything.

Your mortgage balance will get smaller and smaller with every payment. Keep up with these payments and the mortgage will be done by the end of the actual term. During the first years, lenders tend to charge more money for the interest than the capital. Therefore, if you want to sell the home or move throughout the first years, you will notice that the amount you owe is still pretty high.

You should also choose between fixed and variable interest rates. Most lenders provide fixed rates for a specific number of years – usually between two and five years. Then, the rate becomes variable.

How the interest only mortgage works

Interest only mortgages work in a different way. Basically, you only stick to the interest. Month by month, you will pay the interest only. Obviously, since you are not paying any capital, your monthly payments will be relatively low. But then, it does not mean that the capital gets written off. Instead, you will have to pay it when you get to the end of your term.

Just like in the other type of mortgage, you can choose fixed rates to a certain time before moving on to variable rates.

How the capital is paid

The interest only mortgage asks or some planning. The lender must make sure you have a good strategy to cover it – after all, you need to have a large amount of money to pay the capital at the end of the term. There are more criteria to consider, yet most lenders will want to keep an eye on your savings account and ensure money goes there month by month.

Bottom line, while the repayment mortgage is the most common option out there, the interest only mortgage is also worth some attention. It requires good financial stability and may come with all kinds of terms and conditions for the lender to gain confidence in your financial capabilities. After all, the risk your lender takes is pretty high over such a long period of time.

Categorized as Lending

By Daniel

Daniel is not new to the financial industry at all. While he did face a series of money related issues and insecurities as a young adult, his life has changed. Professional education and almost 10 years in a financial institution have helped him gain enough confidence to make responsible choices. These days, Daniel is willing to share some of his thoughts to help others facing the same struggles. He shares up to date guides from his personal experience in this industry, as well as tips and ideas to overcome financial issues and make better choices in a more efficient manner.

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