How does a mortgage work?

Your mortgage is made up of the capital – the amount you’ve borrowed – and the interest charged on the loan.  With most mortgages you pay off the capital and interest monthly over 25 or 30 years, which is why they’re called repayment mortgages.

You can opt for an interest-only mortgage where, as the name suggests, you just pay the interest every month. However, you’ll have to pay off the capital eventually so it’s important to have a repayment plan in place. The number of lenders offering interest-only mortgages has reduced over the last few years because there are concerns that many of those who have them have no repayment plan in place and could be left unable to pay back the capital at the end of the term. 

In the early years, most of your payments go to paying off the interest with a smaller part reducing the capital.  As you get nearer to the end of the term, it switches so that you’re paying more off the capital each month.

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