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For most people, getting a mortgage is one of the most important financial decisions in their lives. When you start to look for the best mortgage, you will see hundreds of mortgage products with different names and associated mortgage deals and interest rates. As a borrower, it is important that you understand the different types of mortgages so you can choose the mortgage that is best suited for you. In this suite of mortgage guides, we look at the different type of mortgages available in the market.
Previously we discussed offset mortgages, in this mortgage guide, we will focus on repayment mortgages.
Repayment mortgages are a 'type of mortgage' that are based on repayments which includes both principal repayment and interest.
During the early years of the mortgage, a large part of the monthly repayments goes towards interest and a smaller part towards the principal. And as the debt goes on decreasing over the years, the interest component in the monthly repayments starts reducing, and the principal component starts increasing.
Example: Let's say you take a mortgage of £250,000 at an APR of 4.9% for 25 years. Assuming a constant interest rate, your monthly repayment will be £1,447 each month. For the first 10 years, you will be making total payments of £173,640 (£1,447 x 12 x 10). Out of this amount, the principal component will be only £65,815. However, on a similar payment of £173,640 for the next 10 years, your principal component will be £107,324. That's because for the next 10 years you are paying interest on a lesser amount as you have already repaid some amount from the original loan.
Some borrowers may worry that the interest component is higher during the initial period of the mortgage. They want to know if they go for a remortgage, say after 10 years, whether their monthly repayments structure will again tilt towards interest. There's no reason to worry because if your debt is the same, your monthly repayment structure will not change because of a remortgage.
Next: Interest Only Mortgages