The Fundamentals of Repayment Mortgage

2007-03-08 10:33:40

( Financial )



When deciding on a mortgage loan, you are given a choice on how you want to pay off the loan each month. You can opt for an interest only mortgage or a repayment mortgage.

With the repayment mortgage system, you are assured of a gradually declining loan amount with every monthly payment you make. This is suitable for first time buyers because of its no-fuss system and the ability to stick to payment schedules. With a repayment mortgage, a big bulk of your payment in the first few months covers the interest with only a small portion going to the principal loan. But as the months progress, the bulk of your payment gradually starts to cover the principal loan. You pay more on interest than on the principal amount at the start but as the months progress, you start to pay off more of the principal.

A repayment mortgage is virtually risk-free and does not encounter the same problems as other investment-linked mortgages. However, you should avoid the temptation to keep the mortgage over a period of several years. A longer term ensures affordability of repayments but a shorter term enables you to pay off your loan faster with much lower interest rates. Once you are through paying off your repayment mortgage, you become the owner of the property.

Some financing companies have attractive repayment mortgage options available should your financial affairs improve later on during the term of your loan. These type of payments are:

1.Step up payments. Step-up payments let you increase your monthly repayment mortgage thereby reducing the principal loan amount on which your interest is based. You end up paying off your repayment mortgage much earlier.
2.Special Payments. You can make special payments on a certain percentage (usually 5 percent or less) of the principal loan amount over and above your monthly repayment mortgage. Special payments will be debited from your principal loan amount and the savings you make on your interest will be adjusted according to your mortgage contract either monthly or annually.
3. Skip payments. If you have made regular step-up or special payments to your repayment mortgage, you have accumulated enough funds to cover your monthly payments. This gives you the option to skip a number of monthly repayment mortgage payments in a year. The number of months allowed depends on your financing company. The step up payments and/or special payments you made will be used to cover the months skipped.
4.Lump sum payments. A lump sum payment is an individual payment – normally more than 5 percent of the principal loan amount. This is paid over and above the monthly repayment mortgage and will lessen permanently your principal loan balance. You can now opt to reduce your monthly repayment mortgage and continue payment of the loan on its original term or formally shorten the loan term by maintaining your monthly repayment mortgage at its current amount.

As with any mortgage you take out, always consult an expert who can help you explore all available options and give you the best deals be it in mortage repayment calculator, debt repayment calculator, morgage repayment or morgage repayment calculator.


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