Capital repayment mortgage

A capital repayment mortgage is the most popular type of repayment method for people in the UK, but it’s not always right for everyone. We compare a capital repayment mortgage with an interest only mortgage to help you decide which is best for your circumstances.

• What is a capital repayment mortgage?
• Capital repayment vs interest only mortgage
• Can you switch from capital repayment to interest only mortgage?
• Can you get a mortgage on benefits?

What is a capital repayment mortgage?

A capital repayment mortgage is where you repay both the interest and a proportion of the value of the loan over a set period of time. Mortgages are often chosen to last for between 20 and 40 years, but can be shorter or longer. Over this term you’ll owe less and less until the loan amount has been fully paid. A capital and repayment mortgage can have a fixed or variable rate.

Capital repayment vs interest only mortgage

While a capital repayment mortgage slowly eats away at the total amount owed, an interest-only mortgage simply clears the monthly interest being charged on the loan. With an interest only mortgage the mortgage holder needs to pay off the rest of the loan at the end of the term but they will have lower monthly bills while the mortgage is still active. 

With capital repayment, the value of the loan gets smaller each month, and therefore so does the interest. At the start of the mortgage term a higher percentage of the monthly payment is going towards interest, but as time goes by the borrower slowly nibbles away at the actual loan and interest in turn reduces. 

Interest only mortgages are cheaper in the short term but much more expensive in the long run because interest is always being charged on the full mortgage amount. These mortgages were more common before the 2008 financial crash and rules were later tightened in 2012. Before then many were sold these loans despite having no means to repay the full mortgage at the end of the term. Interest only loans now come with stricter eligibility such as being older, having a large deposit, or proof of other funds to show how the mortgage will be repaid in full. 

However, Interest only mortgages are still readily available in the buy to let market. Landlords who take out an interest only buy to let mortgage will usually make more in rent than the interest repayments, so can put money aside to either pay back the mortgage at the end of the term or during the term, if their lender allows it.

Capital repayment mortgage pros

• Reduce your mortgage every month if you keep up with repayments.
• It’s easier to repay if you don’t have access to a large lump sum of money.
• Lower deposits needed.
• You can extend the mortgage term if needed.
• Usually works out cheaper than interest only in the long run.

Capital repayment cons

• Monthly repayments will be higher than interest only.

Can you switch from capital repayment to interest only mortgage?

Yes you can switch from a capital repayment mortgage to an interest only mortgage but you need to meet certain criteria. Lenders need to see you have a reliable repayment vehicle to return the loan at the end of the term. This can include stocks and shares, savings, trust fund, or a private pension that you would withdraw. You can promise to sell the house at the end of the term but this usually requires a large amount of equity already in the property to safeguard against a crash in property prices.

An interest only mortgage can be attractive for some who wish to downsize at the end of the term.

To compare capital repayment and interest only mortgages, contact our partners at Brighton and Hove Financial Consultants. They have deals helping you save money and find the best deals for their circumstances.

Can you get a mortgage on benefits?

Yes you can get a mortgage on benefits but it could be more complicated, so you may want to use a mortgage broker to help find the best deal.

Ultimately a mortgage provider is trying to assess how affordable the loan is for you. If as you can show you can meet the monthly repayments, you should be able to get a deal. 

A bad credit score also can provide a hurdle for borrowers. If you are at the top of the borrowers’ chart with a full time job, decent salary, a large deposit and good credit, you will have more mortgages to choose from. The fewer of these attributes you possess, or the weaker they are on paper, the fewer mortgage products become available. 

Some mortgage providers will consider benefits up to a certain limit when looking at how much you can borrow. A few will accept applications from people whose sole, or majority of income is from benefits. All will disregard housing benefits and most will assess how long you're likely to be receiving a benefit.

If your benefits are temporary, such as child benefit that will end soon, it is seen as more risky to lend to you than someone with a long term benefit such as a permanent disability, as the amount of money you will receive in the long term is easier to predict. Shorter term benefits may be discounted from calculations. 

If the amount you receive in benefits fluctuates this can be more difficult for lenders to determine affordability so they might look at an average over the last few months.

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