CAPITAL & INTEREST

A Capital & Interest mortgage is currently the way in which 8 out of 10 people are choosing to arrange their mortgage loan. Capital and interest mortgages involve borrowing a sum of money over a chosen period. Typically 25 years is chosen as the standard term though there is no logical reason for this. It can be longer or shorter than this, it is entirley upto you.

The longer the term the lower the monthly repayments and equally if you shorten the term the payments each month will have to increase to repay the loan faster. The shorter the term the less interest you will pay for borrowing the money.

Most lenders have a minimum and maximum term typically 5 years through to 35, though this does vary. Most lenders are wary of letting people take loans past their retirment age, in case they cannot afford the loan at that point.

With a capital & interest mortgage The borrower makes a monthly payment to the lender, made up of 2 elements: -

Interest charged on the amount borrowed and a capital repayment. Capital is just another word for the amount borrowed. So part of the money you pay each month is the money originally borrowed which reduces the debt and part is interest for borrowing it.

As the capital is gradually repaid each month, the outstanding debt is reduced.  As a result, the interest content gradually reduces and the capital content increases as a proportion of the monthly payment.

During the early years of a repayment mortgage, most of each month’s payment is interest and it is only in later years that this is reversed.  At the end of the pre-agreed term, the loan (capital) is repaid in full.

Advantages of a repayment mortgage for the borrower:-

Guarantee that by the end of the term the mortgage will have been discharged (assuming payments made on time).

You the borrower can see the mortgage liability diminishing each year, increasing the equity you have in the property.

Advantages of a repayment mortgage for the lender:-

More profitable for the lender if the capital that is being repaid can be reinvested in new loans to other borrowers.

Provider has some peace of mind knowing the debt is reducing and the equity in the property is increasing this is therefore available in the event of repossession. Thus as time goes by the lenders risk exposure is reducing.

It is advisable and many lenders insist that you take out sufficient ife cover to protect the loan.