Repayment Mortgages

Repayment mortgages are the safe option for the borrower. Your monthly payment pay off both the capital and the interest, and as long as you make these payments you can guarantee to pay off the whole of the loan. Your monthly payment will be higher than with an interest only mortgage, but you will be getting peace of mind, which is worth something.

The stock market has just come out of a massive boom period, where you could get over 10% in returns and take only a small amount of risk. They could use a PEP or an endowment for an investment vehicle and very easily build up a large enough fund to enable them to pay the loans back and even get a lump sum on top of that. The risk is always there though that the investment plan will not grow enough to pay back the mortgage at the end of the term.

Recently, any investment in the stock market has become extremely risky. And many people's investment vehicles are not scheduled at the moment to pay off their mortgages at the end of the term. It has led to people taking out mortgages needing to be more careful, and repayment mortgages are becoming a good deal more popular. People taking out mortgages for the first time or re-mortgaging are opting for repayment mortgages, and people with interest-only mortgages are changing to repayment mortgages to enjoy the security of knowing that their mortgage is being reduced monthly.

A feature of repayment mortgages is that they are front loaded with interest, so in the first few years of the mortgage, the payments will go mostly towards interest and a lesser amount to the capital. Towards the end of the mortgage, this is reversed, with most of the money going to paying off your capital. This can be disconcerting when you first receive your annual mortgage statement and you see that not much of your capital has been paid off.

It is important that you have some sort of life insurance provision should you die before your mortgage is repaid. Your dependants should not have to sell their home should you die leaving some of your mortgage remaining.

Decreasing term insurance was created to address this. Life insurance providers specifically created this to cover this eventuality. You apply for the insurance when you take out the mortgage, and you will be quoted for premiums based on the amount you wish to be covered for and the term of the mortgage. Other factors will be your age at the time as well. The premiums will be lower than for level term insurance as the mortgage is repaid, reducing the amount covered every month.

 

 

 

© AskFinancially.com 2008

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