Capital and interest mortgage, annuity, repayment – defined

There are four main types of loans, these differ in the way the capital is repaid to the lenders.

Capital & Interest, the most popular type of housing loan, where the borrower makes regular repayments – part interest / part capital. These are usually for an agreed term, typically 25 years however in recent times the term can be as long 30 -35 years.

C&I loans are also know as Repayment mortgage, Standard mortgage and Annuity mortgage. In the early years of a C&I loan the majority of the repayment is used repaying the interest, so the capital reduces slowly.

So as the capital reduces with each repayment, so does the amount of interest payable on that capital.

The other types of loans are interest only repayments with the capital sum been paid at the end of the term from,
a:An Endowment Mortgage
b:A Pension Mortgage
c:The sale of the property / asset.

This means that the borrower pays interest only for the term of the agreement and only repays the capital sum at the end by means of a lump sum.

An Endowment Mortgage means the borrower repays the lender, interest for the full term and undertakes to repay the lump sum from the proceeds of a Life Assurance Endowment Savings Policy. So the borrower makes two payments for the duration of the term, interest only on the full loan outstanding to the lender and a premium to the life company for the policy.

A Pension Mortgage is similar in concept, however the borrower agrees to repay the anticipated lump sum from a pension agreement, Personal Pension Plan, Personal Retirement Savings Account (PRSA), Additional Voluntary Contributions (AVC), a Buy out Bond or an employer sponsored occupational pension scheme.

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