FISCUS MORTGAGES - INFORMATION AND ADVICE

With each monthly repayment made, the money is used to cover both the capital of the loan and the interest due on the capital. This will see a gradual reduction in your overall mortgage debt.

There are two types of repayment mortgage. The first sees the capital repaid in equal monthly instalments for the duration of the mortgage. The second type sees early repayments predominantly consist of interest. The latter repayment mortgage is the most common, so we shall focus on this when talking about repayment mortgages.

At the outset of the mortgage, the capital is at its highest level, and so the monthly interest is also at its highest. As the repayments lower the mortgage capital over time, the amount of interest charged falls (but not necessarily the rate of interest). This means that early repayments will be dominated by interest, but as the loan is slowly repaid, a greater percentage of each subsequent repayment goes towards paying off the capital.

An annual mortgage statement (sometimes quarterly) will give a breakdown of the interest charged and how much of the mortgage capital has been repaid. Unlike an interest-only mortgage, your annual statement will show a falling level of capital owed.

The mortgage provider may insist that a life assurance policy is obtained, so in the untimely death of the borrower, the mortgage debt is repaid in full.

ADVANTAGES

- Certainty. Unlike an interest-only mortgage, which contains the inherent risk of an “investment vehicle”, a repayment mortgage ensures that at mortgage completion, the balance has been paid off in full.

- Depending on your chosen mortgage product's flexibility, lump sum payments and overpayments may be allowed, which would go towards both interest and outstanding mortgage capital borrowed.

- Although there is a strong case for life assurance, it is frequently not a requirement with this type of mortgage, and as such, provides some additional flexibility when deciding upon your repayment strategy.

DISADVANTAGES

- The flip-side of the low risk of a repayment mortgage is that you cannot benefit from a healthy economy. With an interest-only mortgage, your investment vehicle may lead to gains from a booming stock market, and this would translate into mortgage savings. With a repayment mortgage, this cannot happen. However, a repayment mortgage protects against the downside of an investment-led approach.

- As the bulk of early repayments go towards interest, this can disadvantage individuals that frequently move house. Each move sees an initial high-interest repayment, and this can lead to a much smaller amount of capital repaid, as opposed to someone that stays at the same abode for an extended period of time.

- Although some individuals may prefer to take out a mortgage without life assurance, the death of the borrower may result in the need to sell the property to pay off the outstanding debt.