Capital and Interest Mortgages
A capital and interest mortgage is designed to do to things. The first is to be the interest, as the mortgage is usually over a long period of time, the average is 25 years, the amount of interest paid back to he mortgage company is often higher than the loan amount. In many cases two and half times as much. So if you mortgage £100,000 the true amount you can pay back is about £350,000 over the term of the mortgage. As you can see the vast majority of the total amount payable is the interest. This how the mortgage company makes it money. All mortgages in the UK have an interest rate and occur an interest rate.
The capital and interest mortgages or sometimes know as the repayment mortgage pays back both the interest and the capital. You own the property at the end of the mortgage term. This is often the most popular mortgage sold in the UK. AS the risk is very small and the customer always knows where they stand.
One point to consider is the term of the loan. If you double the monthly payments on a 25-years mortgage the term will not be 12.5 years, as you would expect, the term will in effect be just over 7 years.
Interest Only Mortgages
An interest only mortgage is designed to only pay off the interest that accrues against the mortgage. This means that the monthly repayments are much lower than a capital and interest mortgage. However, at the end of the term the original loan value has not been paid back. It is often suggested that you need a vehicle to saving during the term of the mortgage to pay back the original capital. One thing you must take into account is that £100,000 today will be a lot less in 25 years. Meaning if you mortgage £100,000 today over 25 years on an interest only mortgage you would have to pay off the £100,000. However the £100,000 in 25 year time will not be worth the same in today’s money. This is due to inflation and is called the net present value or NPV.
So the amount you nee to save over the 25 years is still £100,000 but it is a lot easier to save that money in the last 10 or so years of the mortgage term. Remember that the mortgage will not be fixed for he 25 years. Meaning you can change the mortgage to fit with you resent circumstances. Most people change the mortgage provider every 4/5 years. It is the shopping around and moving the mortgage to a better deal each time that can save people a lot of money.