Currently, the most common and popular type of mortgage product offered are capital and interest mortgages, which are also known as ‘repayment mortgages’.
In this guide, we’ll discuss what a capital and interest mortgage is, as well as the pros and cons that come with it.
What is capital in mortgage terms?
In mortgage terms, capital refers to the money you borrow. Capital makes up one half of a mortgage and interest, and the charge made by the lender on how much you owe makes up the other half.
Capital and repayment mortgages are the most common type of mortgage being offered from lenders. Most applicants will be accepted for this type of mortgage and as long as you have an appealing credit history and you can afford the repayments, you will be able to apply for a mortgage from most high-street lenders.
How do Capital and Interest mortgage payments work?
At the start of your mortgage term, most of the first payment is used to cover the interest and only a small amount is paid towards reducing the mortgage. Over the course of the mortgage repayment term, more and more of the monthly repayments comprise of the capital.
As your mortgage debt reduces, how much capital you pay increases and the interest you pay will decrease. This means even though how much you pay monthly stays the same (assuming your interest rates don’t change), the debt will start to reduce quicker as the mortgage term reduces.
Once you reach the end of the borrowing period, your mortgage will be paid off and you will no longer have to make any monthly repayments.
Pros and cons of capital and interest mortgage payments
There are a few key reasons why capital interest mortgages tend to be the most popular mortgage product:
- Your debt will be repaid monthly over the length of your agreed mortgage term
- Depending on your lender and terms of your mortgage agreement, you might have the option to extend your repayment term and reduce your monthly instalments. For example, many homeowners choose to increase their mortgage term from 35 to 40 years
- You might be able to make interest-free overpayments
- Repayment mortgages can be as much as 95% of the property value, meaning you will only need a 5% deposit. Some lenders even offer no deposit mortgages, which are ideal for first time buyers and those who can’t afford to save for a deposit
However, like all kinds of mortgage products, there are some cons that you should be aware of:
- Interest rates can change, meaning that once your initial agreed mortgage term is over, there is no guarantee that your interest will decrease or stay the same. For example, if your agreed term is 3 years and you pay an interest rate of 4%, there is no guarantee that this will be lower than 4% when you remortgage
- Mortgage terms can be long, with most lenders offering mortgage terms of 25 years and higher. This may not suit everyone’s circumstances and you must make sure you’re able to meet the monthly repayments
What’s the difference between an interest only and a capital repayment mortgage?
The main difference between an interest only mortgage and a capital repayment mortgage is that interest only mortgages offer lower monthly repayments, since you only pay the interest. However, you must pay the full loan off at the end of the loan term.
With a capital repayment mortgage however, you pay interest and the mortgage repayment each month as a combined sum. Although they are generally more expensive each month, capital repayment mortgages allow you to pay off your mortgage in full and generally result in you paying less overall.
Is a capital and interest mortgage right for me?
If you’re unsure whether a capital and interest mortgage is right for you, you can speak to our team here at Barlow Irvin for expert advice and guidance.
We have years of experience from helping potential homeowners from all walks of life to achieve their home owning dreams, including those who are interested in a capital and interest mortgage.
We always take the time to understand your specific needs and wants, guiding you to make the right choice for your circumstances.