Capital repayment mortgages are similar to standard mortgages, with one major difference. A capital repayment mortgage allows you to repay the capital or principal at a lower interest rate than the initial interest rate on your mortgage; this can save you thousands of pounds over the lifetime of your loan!
But in order to reap these savings, you must pay off the capital early. This isn’t easy, so if you’re considering getting a capital repayment mortgage, make sure you know what you’re getting into and take steps to pay off your principal as soon as possible!
The basics of capital repayment mortgages
It’s essentially an interest-only mortgage in which borrowers pay capital back to their lender each month. This allows them to put some money aside for when they eventually decide to sell their home, helping with that all-important deposit.
The reason it’s not as widely used as repayment mortgages is because they only work if you intend on living in your property long enough for your initial capital loan to be repaid through interest payments.
If you plan on selling after three years, it makes more sense to take out a normal repayment mortgage and make regular monthly repayments so you don’t get caught out paying too much interest further down the line. If you are happy to lock into a longer repayment period – say 25 years – capital repayment mortgages can be good value.
Are you eligible for capital repayment?
There are several criteria that need to be met in order for you to qualify for capital repayment. Firstly, you’ll need to have a high enough income, and there are limits on how much can be earned.
If your partner works, they will also have to meet these limits. The biggest factor when it comes to qualifying for capital repayment is how much equity you’ve built up in your home over time.
How much will it cost me?
Capital repayment mortgages can be an affordable way to borrow money, especially if you have a small deposit and are planning to stay in your home for at least five years.
With a capital repayment mortgage, you repay interest on your loan each month as well as gradually pay off some of the capital (the original amount borrowed).
As time goes by, more of your payments go towards reducing what you owe. However, it’s important to remember that although capital repayment mortgages are flexible and competitively priced, there are fees associated with them – so it’s important that you compare all available products before deciding on one.
This will ensure that any product you choose meets your individual circumstances.
How do I apply?
To apply for a capital repayment mortgage, you should first of all use the Internet to search for the relevant criteria. Thereafter you could make an arrangement with your mortgage broker or even apply directly online, as this facility is becoming more and more popular nowadays.
Is it right for me?
A capital repayment mortgage might sound like something you’ve never heard of, but it could be your ideal mortgage choice. It works out a bit like an installment loan, where each month you make principal repayments and interest payments on your home loan.
You may end up paying less interest over time with a capital repayment mortgage than if you opted for something like an interest-only loan—but there are big benefits to consider too.
Make sure to get in touch with a mortgage broker to find out whether you’re eligible for one of these mortgages and what it could mean for your long-term finances if you took one out.
The Bottom Line
A capital repayment mortgage allows you to pay off your home faster and for less overall cost. Essentially, it’s designed for people who have enough disposable income to pay off their loan in full, more quickly than would be possible under an interest-only arrangement.
You make extra payments that are applied toward both interest and principal until you own your home free and clear.
To qualify for one of these loans, you must have excellent credit (740 or higher), 20% or more equity in your home, and at least five years left on your original term.
With so many people struggling to make ends meet each month, it can seem like a pipe dream to save up an extra £300 or £400 a month to throw at mortgage payments.
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