Capital and Interest Repayment Mortgages

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Repayment Mortgages are also referred to as Capital and Interest Mortgages or Capital Repayment mortgages.

How do Capital and Interest Repayment Mortgages Work

Capital and Interest Repayment Mortgages are now the mortgage of choice and are a popular way of arranging your mortgage. A Capital and Interest Repayment Mortgage ensures that if you pay the stipulated monthly payment until the end of the term, that your mortgage is fully repaid.

Your monthly payment is split into two segments, a capital repayment and an interest charge. Capital repayments reduce the amount you owe to the lender, and reduces the amount on which interest is charged. The interest charge is based on the outstanding balance, usually on a daily basis, but sometimes on a monthly, quarterly, or yearly basis. In the early years of a repayment mortgage the interest charge forms a large part of your payment (as the outstanding balance is higher), but as time goes on, and the balance begins to fall more and more, the interest charge forms much less of the overall payment, and the outstanding capital balance begins to reduce quicker and quicker.

In the early period of your mortgage you pay off mostly interest and then slowly as the amount of capital owed reduces, you pay less interest and therefore pay off more and more capital. Capital Repayment Mortgages always have a higher monthly repayment than an Interest Only Mortgage, this is because at the end of your mortgage term you will own your property 100% outright, where as with an interest only mortgage, you will still owe the original amount you borrowed, unless you have made additional payments to your mortgage.

How do changes in interest rates affect a Capital and Interest Repayment Mortgage?

When interest rates change, either by increasing or decreasing, and you are not on a fixed rate, it has much less of an effect on a Capital and Interest Repayment Mortgage compared to an Interest Only Mortgage. This is because the interest rate change will only affect the interest charge of the monthly payment, and not the capital element. If you have an Interest Only Mortgage, then any interest rate change will have a much more profound effect, as the whole payment is made up solely of an interest charge.

Does Higher Payments on a Capital and Interest Repayment Mean Worse Value?

Although the monthly payment on a Capital and Interest Repayment Mortgage is higher than on an Interest Only Mortgage, it actually works out much better value over the longer term to do a Capital and Interest Repayment Mortgage. On a capital and interest mortgage, every payment you make reduces the balance of the amount you owe - you the amount of interest you pay reduces, and the total amount due at the end of the mortgage, or any period after the start would be lower compared to an interest only mortgage. This clearly shows that a Capital and Interest Repayment Mortgage, although more expensive on a monthly basis, works out better value than an interest only mortgage in the long term.