A repayment mortgage is a type of mortgage option that requires the debtor to tender monthly installment payments that are applied to both the principal balance of the loan and the interest that is currently payable. This basic model is utilized in most situations, and makes it possible to incrementally pay off a larger share of the principal as more installment payments are made on the overall debt. There are several benefits to this approach that are commonly identified by mortgage providers and customers alike, including the careful arrangement of payments to ensure that the loan is retired at a specific point in the future.
One of the advantages of a repayment mortgage is the ability to adjust the amount of the monthly payment with relative ease, when and as desired by the debtor. As with many other types of mortgages, the payments made the first few years of the loan primarily focus on paying the interest component of the overall balance. As time goes on, a greater portion of the payments is applied to the principal. In the event that the homeowner determines he or she can increase the amount of those monthly installments, the lender simply recalculates the schedule of payments to accommodate the higher payment identified by the debtor and identifies a new settlement date for the contract.
The structure of a repayment mortgage is also helpful in protecting the homeowner’s equity in the property. Since the mortgage balance is reduced each month, the chances of falling into a negative equity situation are somewhat limited. After the first several years when the focus is on retiring a larger portion of the interest on the loan, the chance for a negative equity situation becomes less and less of a possibility.
This increase in equity is extremely important, especially for homeowners who plan choose to move after ten to fifteen years, or who decide to remortgage in order to take advantage of lower fixed rates that were not available in the past. Since the repayment mortgage allows for the structured increase of equity, especially after the first few years of the mortgage term, there is a good chance the homeowner will have enough equity in the property to command very attractive terms for that refinanced mortgage. In the event that the owner wishes to sell the property, the structure of the repayment mortgage helps to ensure there is a significant amount of equity in the home, providing the owner with a significant amount of money once the mortgage is settled in full.