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What’s The Difference Between Capital And Interest?
Each mortgage is always divided into two sections:
Those clients that opt to use interest-only mortgage will make payment of the interest on a monthly basis and then at the end of the mortgage term they pay the capital.
Repayment mortgage will require you to pay the interest and the capital simultaneously.
This is the mortgage repayment option that most people are accustomed to. It is the most popular and available from many lenders. In this case, monthly payments are made for an agreed duration (which is usually referred to as a term) until all the capital and interest has been cleared.
What this implies is that as time goes by, the mortgage balance keeps on declining. That is true only if you stick to the plan and make repayments as needed. The whole mortgage will be cleared once the term is over, usually 25 years.
One thing you have to be aware of is that starting to repay a mortgage basically means you are repaying the interest. If you have the intention of clearing the mortgage or moving to a new house within a few years, you will realize the loan is not cleared much.
That puts you in a position where you have to decide on the repayment mortgage type that you will go for. That is, should the interest rate be fixed over time or should it be variable? If it variable, the interest will either goes up or down, depending on the market situation.
Interest-only mortgage requires you to make payment of the interest due on the borrowed cash on a monthly basis. The rest of the money will then be repaid back at the end of the mortgage term. In this case, the monthly payments are less but in real sense you still owe the original borrowed amount. Just as it is with repayment mortgage, you can use interest rate that is fixed over time or decide to use a variable one.
Combined Interest-Only And Repayment Mortgages
There are lenders who will give you a mortgage basing on part-interest-only and part-repayment basis. The idea behind this option is that when the term comes to an end, you will still owe some mortgage capital and that will have to be repaid. Each lender has come up with their own rules that apply in this type.
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