MORTGAGE REPAYMENTS
Mortgage repayment options explained
A mortgage payment can be structured in different ways. With a repayment mortgage, payments normally cover both interest and part of the amount borrowed. With an interest-only mortgage, payments normally cover the interest while the mortgage balance remains to be repaid.
Understanding how the repayment method affects the mortgage balance can help you compare different mortgage arrangements.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
THE BIG PICTURE
What can a mortgage payment consist of?
Mortgage payments depend on the way the mortgage is structured. Two important components are the interest charged and repayment of the amount borrowed.
MORTGAGE PAYMENT
INTEREST
Cost of borrowing
The interest charged on the mortgage borrowing.
The amount borrowed
The mortgage balance that ultimately needs to be repaid.
HOW ARE THEY DEALT WITH?
REPAYMENT MORTGAGE
Interest + Capital
Scheduled payments normally cover the interest charged and repayment of part of the mortgage balance.
INTEREST-ONLY MORTGAGE
Interest during the mortgage term
Scheduled payments normally cover the interest charged, while the capital remains to be repaid separately.
The repayment method affects what happens to the mortgage balance
With a repayment mortgage, the balance is designed to reduce through the scheduled payments. With an interest-only mortgage, the capital normally remains outstanding unless it is repaid separately.
REPAYMENT MORTGAGES
How does a repayment mortgage work?
With a repayment mortgage, each scheduled payment normally includes interest and repayment of part of the amount borrowed.
01
MORTGAGE START
The mortgage balance begins
The amount borrowed forms the starting mortgage balance.
02
PAYMENTS OVER THE TERM
Payments cover interest and capital
Scheduled payments normally include the interest charged and repayment of part of the mortgage balance.
03
END OF MORTGAGE TERM
The balance is intended to be repaid
If the mortgage proceeds according to its terms and all required payments are made, the scheduled repayments are designed to repay the mortgage by the end of the term.
WHAT HAPPENS TO THE BALANCE?
The split between interest and capital can change over time
The amount of each payment attributable to interest and capital can vary during the mortgage term.
INTEREST-ONLY MORTGAGES
How does an interest-only mortgage work?
With an interest-only mortgage, scheduled payments normally cover the interest charged on the mortgage rather than repaying the amount borrowed.
INTEREST-ONLY MORTGAGE
Interest and capital are dealt with differently.
MORTGAGE CAPITAL
MORTGAGE CAPITAL
↓
REMAINS OUTSTANDING
↓
END OF MORTGAGE TERM
↓
CAPITAL MUST BE REPAID
Unless capital is repaid separately during the mortgage term, the outstanding amount remains to be repaid.
Interest-only does not mean the mortgage balance disappears
Unless capital is repaid separately, the amount borrowed remains outstanding and must ultimately be repaid.
REPAYING THE CAPITAL
How is the capital repaid on an interest-only mortgage?
An interest-only mortgage requires a way of repaying the outstanding capital. The proposed repayment strategy and whether it is acceptable will depend on the mortgage and lender requirements.
SAVINGS OR INVESTMENTS
Money accumulated separately may form part of a repayment strategy.
SALE OF AN ASSET
The planned sale of an asset may sometimes form part of a repayment strategy.
OTHER PLANNED FUNDS
Other expected funds may sometimes be relevant, depending on the circumstances and mortgage requirements.
A repayment strategy needs to be considered carefully
The value or availability of money intended to repay the mortgage may not develop as expected. Mortgage requirements and individual circumstances also vary.
COMPARING REPAYMENT METHODS
How do repayment and interest-only mortgages differ?
The key difference is how the capital is repaid
With a repayment mortgage, capital repayment forms part of the scheduled payments. With an interest-only mortgage, the outstanding capital normally needs to be repaid separately.
MORTGAGE PAYMENTS
What can affect the amount you pay?
FOUR PARTS OF THE MORTGAGE TO CONSIDER
01
Interest rate
The applicable mortgage rate affects the amount of interest charged.
02
Mortgage balance
The amount outstanding affects the interest and capital involved.
03
Mortgage term
The length of the mortgage can affect the scheduled payments and the period over which the mortgage is repaid.
04
Repayment method
Whether the mortgage is repayment, interest-only or another permitted structure affects how payments are calculated.
CHANGING REPAYMENT METHOD
Can the repayment method be changed?
A change between repayment methods may sometimes be possible, but it is not automatic. It can depend on the mortgage terms, lender requirements, affordability and individual circumstances.
01
CURRENT ARRANGEMENT
Current repayment method
The mortgage has an existing repayment structure.
02
REQUEST / REVIEW
A change is considered
A borrower may ask about changing the way the mortgage is repaid.
03
ASSESSMENT
Lender requirements and affordability
Any change may be subject to the lender’s requirements, affordability assessment and the terms of the mortgage.
04
POSSIBLE OUTCOME
A new arrangement may be available
If the relevant requirements are met, a different repayment arrangement may be possible.
A change is not automatic
Whether a repayment method can be changed depends on the mortgage, the lender’s requirements and the borrower’s circumstances.
QUESTIONS TO CONSIDER
Questions worth considering when comparing repayment methods
01
How will the mortgage balance be repaid?
Understand whether capital is repaid through the scheduled payments or by a separate repayment strategy.
02
What will the scheduled payments cover?
Check whether the scheduled payments cover interest, capital, or both.
03
What happens to the balance during the mortgage term?
Consider whether the balance is designed to reduce through the scheduled payments or remains outstanding.
04
If capital remains outstanding, how will it ultimately be repaid?
Consider the proposed repayment strategy and the requirements or risks associated with it.
05
How could changes in interest rates affect payments?
The effect can depend on the mortgage rate, repayment method and other mortgage terms.
06
What happens at the end of the mortgage term?
Understand what should have been repaid by then and whether any capital may still be outstanding.
COMMON QUESTIONS
Mortgage repayment options FAQs
What is a repayment mortgage?
What is an interest-only mortgage?
Does an interest-only mortgage repay the amount borrowed?
What happens at the end of an interest-only mortgage?
Can I change from interest-only to repayment?
Is a repayment or interest-only mortgage better?
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