Capital Repayment Mortgage vs. Interest Only

Attribute	Capital Repayment Mortgage	Interest Only
Definition	A mortgage where both the principal and interest are repaid over the loan term.	A mortgage where only the interest is repaid during the loan term, with the principal remaining unchanged.
Monthly Payments	Higher, as they include both principal and interest payments.	Lower, as they only include interest payments.
Principal Repayment	Gradually reduces over time until fully repaid at the end of the loan term.	No principal repayment during the loan term, resulting in a balloon payment at the end.
Interest Repayment	Decreases over time as the principal reduces.	Remains constant throughout the loan term.
Total Interest Paid	Lower, as the principal is gradually repaid.	Higher, as the principal remains unchanged.
Risk	Lower, as the loan balance decreases over time.	Higher, as the principal remains unchanged and requires a balloon payment.

Introduction

When it comes to choosing a mortgage, there are several options available to borrowers. Two popular choices are the capital repayment mortgage and the interest-only mortgage. Both options have their own set of attributes and considerations that borrowers need to take into account. In this article, we will compare the attributes of these two mortgage types to help borrowers make an informed decision.

Capital Repayment Mortgage

A capital repayment mortgage, also known as a repayment mortgage, is a type of mortgage where the borrower makes regular monthly payments that include both the interest and a portion of the principal amount borrowed. Over time, the borrower gradually pays off the entire loan amount, resulting in full ownership of the property at the end of the mortgage term.

One of the key attributes of a capital repayment mortgage is that it allows borrowers to build equity in their property. With each monthly payment, the outstanding loan balance decreases, and the borrower's ownership stake in the property increases. This can be particularly beneficial for individuals who view their property as a long-term investment and want to eventually own it outright.

Another advantage of a capital repayment mortgage is that it provides borrowers with a clear repayment plan. Since the loan is gradually paid off over time, borrowers can easily track their progress and know exactly when they will be mortgage-free. This can provide peace of mind and financial stability, especially for those who prefer a structured approach to debt repayment.

Additionally, capital repayment mortgages are generally considered less risky for lenders. The gradual reduction of the loan balance means that the lender's exposure to risk decreases over time. This reduced risk profile often translates into lower interest rates compared to other mortgage options, making capital repayment mortgages more affordable for borrowers in the long run.

However, it's important to note that capital repayment mortgages typically have higher monthly payments compared to interest-only mortgages. This is because the borrower is not only paying the interest but also gradually repaying the principal amount borrowed. For some borrowers, this higher monthly payment may strain their monthly budget and limit their ability to save or invest in other areas.

Interest Only Mortgage

An interest-only mortgage is a type of mortgage where the borrower only pays the interest on the loan for a specified period, typically between 5 to 10 years. During this period, the borrower's monthly payments are lower compared to a capital repayment mortgage since they are not repaying the principal amount borrowed.

One of the main attractions of an interest-only mortgage is the lower monthly payments. This can be particularly appealing for borrowers who are looking for more flexibility in their monthly budget or who have other financial commitments to prioritize. The lower payments can free up cash flow, allowing borrowers to invest in other areas or save for future expenses.

Another advantage of an interest-only mortgage is that it can provide borrowers with greater short-term affordability. Since the monthly payments are lower, borrowers may be able to afford a larger loan amount or a more expensive property compared to what they could afford with a capital repayment mortgage. This can be beneficial for individuals who are confident in their ability to generate higher income in the future or who are looking to maximize their purchasing power.

However, it's important to consider the potential drawbacks of an interest-only mortgage. One significant disadvantage is that at the end of the interest-only period, the borrower still owes the full principal amount borrowed. This means that they will need to make arrangements to repay the principal, either by refinancing, selling the property, or using other sources of funds. Failing to do so can result in financial difficulties and potential loss of the property.

Furthermore, interest-only mortgages are generally considered riskier for lenders. Since the borrower is not repaying the principal amount borrowed during the interest-only period, the lender's exposure to risk remains constant. This increased risk profile often translates into higher interest rates compared to capital repayment mortgages, making interest-only mortgages more expensive in the long run.

Conclusion

Choosing between a capital repayment mortgage and an interest-only mortgage is a decision that should be based on individual circumstances and financial goals. A capital repayment mortgage offers the advantage of building equity, a clear repayment plan, and lower long-term costs. On the other hand, an interest-only mortgage provides lower monthly payments, short-term affordability, and greater flexibility. It's important for borrowers to carefully consider their financial situation, risk tolerance, and long-term plans before making a decision. Consulting with a mortgage advisor can also provide valuable insights and guidance to help borrowers make the right choice for their specific needs.