Capital
and interest Loan
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 re
mortgaging 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 ordinarily 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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