Capital
and interest mortgage
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Also
known as a repayment mortgage. This is where as you make your
monthly mortgage payments you pay a
percentage
of the debt side of the advance the lender gave you and you
will also be paying off the monthly interest as well. This
means at the end of the full mortgage term there will be no
outstanding mortgage debt to pay if you have been prompt and
paid in full all your payments. This is a very safe way to
handle your debt as you are not vulnerable to any other investment
making enough money to pay off the original advance.
At the start of the mortgage term you will be paying more
interest than capital but as you reach the end of the term
this reverses so you are mainly paying capital off. So regular
remortgaging can mean that you are only paying a small percentage
of the capital off. If the mortgage is over a longer term
the more interest you will pay in total, as opposed to a shorter
term though the monthly payments will be lower. It may be
therefore in your interest to pay off a home loan as fast
as possible in order to pay less interest.
Interest
only mortgage
This
is where your mortgage payment is purely interest and no capital
is being paid. So there must be a way to repay the capital
debt. Normally this will run along side a payment vehicle
geared to match the total debt due at the end of the term.
For example an ISA or pension investment. The disadvantage
of this is that the value of an investment can go up as well
as down. Past performance is not a guide to future
performance.
Though your monthly payments will be lower. Some people have
pure interest only with no formal repayment vehicle but instead
rely on down sizing orgenerally moving to a smaller cheaper
property and using the capital appreciation. This is a more
risky option as markets can rise as well as fall.
It
is the borrower's responsibility to ensure sufficient funds
are available on the completion of the mortgage term to repay
the outstanding capital.
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