Repayment mortgage
Encyclopedia
A repayment mortgage is a term generally used in the UK
to describe a mortgage
in which the monthly repayments consist of repaying the capital amount borrowed as well as the accrued interest, so that the amount borrowed decreases throughout the term and by the end of the loan term has been fully repaid. This contrasts with an interest-only mortgage (such as an endowment mortgage
or some types of balloon payment mortgage
) where monthly repayments are for interest, and the borrower must repay the full loan at term in a lump sum.
One advantage of a repayment mortgage is that it removes the risk of having an investment (as exists in an endowment mortgage
), the performance of which is dependent on the stockmarket. The borrower is also less likely to suffer from negative equity
because the mortgage balance will be reducing month on month.
As time moves on, the equity percentage in the property increases. However, in the early years the bulk of the mortgage repayments consist of the interest component, so not much of the capital is actually paid off for some time.
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
to describe a mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
in which the monthly repayments consist of repaying the capital amount borrowed as well as the accrued interest, so that the amount borrowed decreases throughout the term and by the end of the loan term has been fully repaid. This contrasts with an interest-only mortgage (such as an endowment mortgage
Endowment mortgage
An endowment mortgage is a mortgage loan arranged on an interest-only basis where the capital is intended to be repaid by one or more endowment policies. The phrase endowment mortgage is used mainly in the United Kingdom by lenders and consumers to refer to this arrangement and is not a legal...
or some types of balloon payment mortgage
Balloon payment mortgage
A balloon payment mortgage is a mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size. Balloon payment mortgages are more common in commercial real estate than in...
) where monthly repayments are for interest, and the borrower must repay the full loan at term in a lump sum.
One advantage of a repayment mortgage is that it removes the risk of having an investment (as exists in an endowment mortgage
Endowment mortgage
An endowment mortgage is a mortgage loan arranged on an interest-only basis where the capital is intended to be repaid by one or more endowment policies. The phrase endowment mortgage is used mainly in the United Kingdom by lenders and consumers to refer to this arrangement and is not a legal...
), the performance of which is dependent on the stockmarket. The borrower is also less likely to suffer from negative equity
Negative equity
Negative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan. In the United States, assets with negative equity are often referred to as being "underwater", and loans and borrowers with negative equity are said to be "upside down".People...
because the mortgage balance will be reducing month on month.
As time moves on, the equity percentage in the property increases. However, in the early years the bulk of the mortgage repayments consist of the interest component, so not much of the capital is actually paid off for some time.
See also
- UK mortgage terminologyUK mortgage terminology-Introduction:The UK mortgage market is one of the most innovative and competitive in the world. Most borrowing is funded by either mutual organisations or proprietary lenders...