The term repayment type refers to the method used to pay back your mortgage. There are two repayment types – the repayment loan and the interest only loan.
If you choose a repayment mortgage, you pay a portion of the interest on the loan and a portion of the actual loan each month. To begin with, you’ll find you are paying mostly interest, but over time, you’ll gradually pay more of the actual loan back to the lender. By the end of the term, the amount owed reduces far more quickly, because you’re paying off mainly the capital by that stage.
The alternative is to get an interest only loan. The idea with this is that your monthly repayments will be smaller, since you’re not paying off any of the capital. You only pay the interest, hence the name for this repayment type. However, if you continued to pay off just the interest for the full term, you’d end up with the original capital amount remaining to be paid off once the term is completed. That’s why this type of loan requires you to have alternative options in place for paying off the capital at the end of the term. This could come from investments made elsewhere, although you must be sure the investments will grow enough to meet the amount required.
The most popular repayment type is the repayment mortgage. Monthly repayments may be pricier in this instance, but they ensure you will clear the entire sum by the end of the term.