Capital Repayment Mortgage

With a capital repayment mortgage the borrower makes monthly payments to the lender. This payment consists of a proportion of the capital sum and accumulated interest. Assuming interest rates do not change the repayments remain level over the term of borrowing. At the end of the mortgage term the loan will be repaid, together with all the interest due.

Whilst repayments remain level, the combination of the capital and interest elements changes over the years. Initially interest makes up a high percentage of the amount repayed but with each repayment an amount of capital is paid back resulting in a reduction of the outstanding total. With the reduction of the total loan there is also a reduction in the amount of interest. This means that more of the monthly repayment goes towards reducing the outstanding capital.

With some more flexible mortgage options you can arrange to repay increased amounts of the capital, consequently allowing repayment of the mortgage earlier than when making level repayments. This will also reduce the amount of interest paid on the total borrowed amount.

If there is a rise in interest rates then repayments may be increased by the lender or allowed to remain unchanged with the term of the loan extended instead (this depends on the mortgage option you have agreed).

Many lenders recommend the borrower also takes out appropriate life cover with their mortgage, usually in the form of a mortgage protection policy or term assurance. This provides the borrower with the security of knowing that in the undesirable event of their death that the mortgage repayments will be covered by the life cover.