When you take out a mortgage in the UK, one of the primary methods of repaying the loan is through capital repayment.
Capital repayment, also known as a repayment mortgage, is the most common type of mortgage repayment method used by homeowners in the UK.
In this approach, each monthly payment you make consists of both interest charges and a portion of the loan principal.
Over time, as you continue to make these payments, your debt gradually decreases until it is fully repaid by the end of the mortgage term.
Monthly Payments
With a capital repayment mortgage, your monthly payments are designed to cover two components: interest and capital. The interest portion of your payment is calculated based on the outstanding loan balance and the interest rate agreed upon with the lender.
Principal Reduction
Each time you make a mortgage payment, a portion of it goes towards reducing the principal amount you owe. This gradual reduction in principal helps to build equity in your property over time. At the beginning of the mortgage term, a larger portion of your monthly payment goes towards interest, while the portion allocated to principal gradually increases as the loan balance decreases.
Decreasing Interest Charges
As the principal balance of your mortgage reduces, the interest charges also decrease. This occurs because the interest is calculated based on the outstanding loan amount. Therefore, as you make regular capital repayments, the remaining loan balance reduces, resulting in lower interest charges.
Equity Build-up
One of the significant advantages of capital repayment mortgages is the build-up of equity in your property. Equity is the difference between the market value of your property and the outstanding mortgage balance. As you continue to make capital repayments, your equity increases, providing you with a valuable asset and potential borrowing power in the future.
Mortgage Term
The mortgage term is the agreed-upon length of time over which you will repay the loan. Common mortgage terms in the UK range from 25 to 35 years, although shorter or longer terms are also available. By the end of the mortgage term, assuming all payments are made as agreed, you will have fully repaid the loan, and the property will be owned outright.
Mortgage Amortisation Schedule
An amortisation schedule is a table that outlines the breakdown of each mortgage payment over the term. It shows the amount applied to interest, the amount applied to principal, and the remaining balance after each payment. This schedule helps you track the progress of your loan repayment and understand the impact of extra payments or changes in interest rates.
Advantages
Capital repayment mortgages provide the security of knowing that your mortgage balance is steadily decreasing over time. It offers a clear path to full homeownership, as you make regular payments and ultimately own the property outright. Additionally, as your loan balance decreases, it becomes easier to remortgage or access better mortgage rates in the future.
Important Note
It’s important to note that during the initial years of a capital repayment mortgage, the majority of your monthly payment will go towards interest, with only a small portion allocated to the principal. However, as the loan term progresses, the interest portion decreases while the principal reduction portion increases.