Different Mortgage Repayment Types: An Overview

When taking out a mortgage, it is important to know about the different mortgage repayment types available. In this article, we will provide you with a brief overview of some of the most common mortgage repayment types that you may encounter when searching for a mortgage.

Capital Repayment Mortgage

The capital repayment mortgage is the most common type of mortgage repayment and the one that ensures that the mortgage will be fully repaid at the end of the term if you make your monthly repayments on time. This type of mortgage is considered the least risky, but it is also the most expensive option.

Interest Only Mortgage

The interest only mortgage type was very popular a few decades ago, especially when endowment policies and pension policies were used to repay them and interest rates were high. Nowadays, it is mainly reserved for a niche set of clients and buy to let lending. This type of mortgage offers a lower monthly cost, but because you are only paying back the interest, the capital remains outstanding at the end of the mortgage term. There is a greater risk of negative equity with this type of mortgage, and there is no guarantee that you will be able to pay it back at the end of the term unless you have a separate repayment vehicle or strategy in place.

Part and Part Repayment

The part and part repayment is a combination of both interest only and capital repayment. It reduces some of the risk because some of the mortgage will be repaid at the end of the term, but it still comes with a certain level of risk as the interest only element is still present. This type of mortgage is popular with people who have a lower basic salary but a larger bonus structure, such as car salesmen. They opt for the part and part repayment to reduce their monthly cost and use the overpayment allowance on their mortgage to repay some of the capital.

Final Thoughts

The most popular and least risky option in the market is the capital repayment mortgage. This is the type of mortgage that most first-time buyers and people looking to move house opt for. Interest only remains popular in the buy-to-let market and rental market as it allows landlords to maximize their monthly cost while building up a cash reserve from the profit they make each month.

In conclusion, it is important to consider the different mortgage repayment types and to fully understand the risks and benefits of each before making a decision. Make sure to do your research and work with a mortgage advisor to find the best option for you.

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