For mortgage repayment plans, you have three options–repayment, interest-only, and a combination of repayment and interest-only. How much you will have to pay under any of these options will be determined by capital and interest.
What are capital and interest?
There is a variety of mortgage terms you will come across when applying for a mortgage and two of the most popular are capital and interest.
Capital can be described as the actual sum borrowed. Interest is the charge placed on the money borrowed. The interest to be paid on the borrowed sum is determined by the lender.
When a borrower opts for a repayment mortgage, capital and interest will be paid at the same time. But if it is an interest-only mortgage, only the interest will be paid to the lender monthly while the capital will be repaid upon expiration of the mortgage term.
The repayment mortgage plan is the most popular option. Under a repayment mortgage, the sum to be repaid by the borrower to the lender every month will be calculated as a combination of the capital and interest. The monthly repayments will be made over a specified period until the debt is completed.
Because repayments are made monthly, the actual debt will gradually reduce after each month. The mortgage term can be five, ten, or even 25 years.
How much you pay per month will also be determined by the sort of interest rate you opt for–fixed interest rate or variable interest rate. A fixed interest rate won’t change for the duration of the debt, but a variable interest rate may fluctuate depending on market forces.
If you opt for an interest-only mortgage, you will be required to pay only the interest that’s due on the loan every month. But the capital will still be paid in full at end of the loan term.
Under an interest-only mortgage, you have the option for a fixed or variable interest rate on the loan.
What if the interest rate goes up?
This only matters if you opt for a variable interest rate. So before choosing a variable, verify that you can make repayments even if the interest rate rises by 2%. When calculating a mortgage repayment under such an arrangement, add 2% to the current rate so your calculations will be based on the worst case scenario.
The Formula for Calculating Mortgage Repayment
Monthly mortgage repayments for a fixed-rate loan can be calculated using the formula
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
· M is the monthly mortgage payment.
· P is the principal.
· i is the monthly interest rate.
· n is the number of payments over the term of the loan.
This might be beyond people who are not mathematically gifted, but luckily there are a number of mortgage calculator tools online that will help you get a quick view on how your repayments will stack up, based on what you are spending on your property.
Getting on the property ladder is now more important than it has ever been, so finding a mortgage that suits you is vital.