Best Buy Mortgages Glossary - Repayment Mortgages
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Repayment Mortgages
A mortgage where the capital is repaid gradually over the term
of the mortgage. Each Monthly payment is made up of interest due
on the outstanding debt (the cost of 'servicing' the loan), and
an additional sum applied to reducing the capital balance. In
the early years most of each month's payment is comprised of
interest. In later years, more capital is repaid with the result
that the balance outstanding reduces.
Repayment mortgages have their pros & cons:
Advantages of Repayment Mortgages:
The mortgage will be repaid eventually, providing full monthly
payments are maintained throughout the mortgage term (usually 25
years). The loan will be repaid whatever happens to the stock
market or any other investment market.
Disadvantages of Repayment Mortgages:
In the early years of the loan, most of the monthly repayment
goes to pay off interest - the capital outstanding on the
mortgage is hardly reduced. There is no possibility of achieving
any additional investment return or surplus at the end of the
mortgage term. A separate mortgage protection (term assurance)
policy ought to be taken out.
People who take out these straightforward (plain vanilla)
mortgages, are usually urged to arrange a separate mortgage
protection or term assurance policy, so that should the mortgage
payer die, the debt can be immediately paid off by his/her
heirs.
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