What is the Difference Between Interest Only and Capital Repayment Mortgage?
🆚 Go to Comparative Table 🆚The main difference between an interest-only and a capital repayment mortgage lies in the way you repay the loan to your lender. Here are the key differences between the two:
Interest-Only Mortgage:
- Monthly payments cover only the interest charged on the loan.
- The capital (the amount borrowed) remains the same until the end of the term.
- At the end of the mortgage term, the capital will need to be paid in full.
- Lower monthly repayments, as you are only paying the interest.
- Optional capital payments can be made, allowing you to chip away at your mortgage debt during the term if you want to.
Capital Repayment Mortgage:
- Monthly payments cover both the interest and a portion of the capital.
- The capital borrowed gradually reduces over time.
- At the end of the mortgage term, the capital will have been fully repaid.
- Higher monthly repayments, as you are paying both interest and capital.
- The mortgage debt is paid off across the term, which is typically 25 years, but can be longer or shorter.
In summary, an interest-only mortgage allows you to make lower monthly payments by only paying the interest, while a capital repayment mortgage requires higher monthly payments as you pay both interest and capital. At the end of the term, the capital must be paid in full for an interest-only mortgage, whereas the capital is gradually reduced and repaid in full for a capital repayment mortgage.
Comparative Table: Interest Only vs Capital Repayment Mortgage
The main difference between an interest-only and a capital repayment mortgage lies in the way you repay the loan to your lender. Here is a table summarizing the key differences between the two types of mortgages:
Feature | Interest-Only Mortgage | Capital Repayment Mortgage |
---|---|---|
Monthly Payments | Covers only interest charges on the loan. | Covers both interest charges and capital repayments. |
Loan Term End | Requires paying the full capital borrowed as a lump sum. | Repays the loan in full by the end of the term. |
Monthly Payment Amount | Typically lower, making it more affordable. | Typically higher, potentially reducing disposable income. |
Flexibility | Optional capital repayments. | Gradually reduces the capital borrowed. |
Repayment Plan | Lender requires a plan for repaying the capital at the end of the term. | Ownership of the property is fully transferred to the purchaser at the end of the term. |
An interest-only mortgage offers lower monthly payments, but you must pay off the loan in full at the end of the loan term. On the other hand, a capital repayment mortgage has higher monthly payments, but the loan is fully repaid by the end of the term. It is essential to consider your financial situation and long-term plans when choosing between these two mortgage types.
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