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Capital and interestA repayment mortgage is the most used way of repaying a mortgage loan. This is done by making regular payments of both capital and interest from the loan over a certain period of time. These payments are calculated using time value of money formulas. Other details such as the amount of interest that you pay can be subject to other factors such as how interest is compounded. This can be done daily, yearly or semi-annually; or by way of being calculated as part of a 360 day year. Other factors such as prepayment penalties may also factor as a feature.The length of the mortgage loan can also vary. The common practice for the UK is for a mortgage to be taken out for 25-30 years as a maximum; however, shorter periods (for example 15 years) are quite common and longer mortgages (anywhere up to 50 years) can also be arranged with the lender. Capital and interest mortgages are named as so as each monthly payment made, pays off both capital and interest from the loan. The amount of capital and interest that is paid by the monthly payments often differs throughout the term of the loan. For example, at the beginning period of the mortgage most borrowers are paying off little capital and more interest. However, towards the end of the loan this switches to the other way around. In order for the lender to ensure that the loan is cleared by the end of the term, payments are decided at the beginning with a clear date at the end at which the mortgage loan is to be cleared by. |
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