Repaying the Capital on your Mortgage

Most who take out a mortgage can’t wait to pay it off. This means that in addition to paying off the interest on the
mortgage loan, repaying the capital must be part of the equation as well.

Let’s examine this by breaking down the components associated with repaying the capital. These include: capital and
interest; interest only; no capital or interest; interest and partial capital; and foreclosure and non-recourse lending.

Repaying the Capital: Capital and Interest Defined

When you take out a mortgage, the money can be divided into two categories: capital and interest.

What is capital as it relates to mortgage loans? FYI, capital is commonly referred to as the principal in the
financial/banking industry.

The strict definition of principal is the loan (debt) amount on which on which interest is calculated. So, as
it relates to mortgages, principal is the amount owed on an existing mortgage, excluding the interest.

Interest is the fee lenders charge to lend money. Interest is generally a fixed percentage based on the amount
borrowed and other factors.

Repaying the Capital: How it works

Capital owed is reduced with each mortgage payment made. When repaying the capital, borrowers are usually paying much
less toward the capital in the beginning. In the early years of a mortgage, most of the payments go towards paying
off the interest.

In the final years of a mortgage, most of the mortgage payments made go towards repaying the capital. As you can see,
repaying the capital goes hand-in-hand with repaying the interest on a mortgage loan.

Repaying the Capital: Interest-only Mortgages

As discussed above, repaying the capital goes hand-in-hand with repaying the interest on a mortgage loan. However,
there are loans where you are not repaying the capital – only the interest – at least for a certain amount of time.

Interest-only Mortgages

Interest-only Mortgages can be a blessing or a curse, depending on which situation you find yourself in.
But what exactly are Interest-only Mortgages – and why aren’t you repaying the capital?

Interest-only mortgages, unlike other mortgages, are mortgages where you aren’t repaying the capital –
at least not on a regular monthly basis. So, what about repaying the capital on an interest-only loan?
When does this happen?

Repaying the capital is usually done via funds accrued through some type of endowment policy taken out when a
borrower first applies for a mortgage. Interest-only Mortgages appeal to many home buyers because they usually
mean lower monthly payments (remember, you’re not repaying the capital, only the interest in the beginning).

Interest-only Mortgages are risky because they depend on real estate to rise in value in order to be able to pay
off the debt. However, if the real estate market sinks, then borrowers could be faced with dire financial consequences.

Repaying the Capital: No Capital or Interest Mortgages

Don’t worry about repaying the capital. Take it a step further: don’t worry about paying the interest.
Yes, there are actually mortgages that allow you to do this – no capital or interest mortgages. What are these?

No capital or interest mortgages are known by a few names – equity release mortgages,
reverse mortgages, lifetime mortgages.

Who should take out No Capital or Interest Mortgages

Senior citizens are prime candidates for No Capital or Interest Mortgages because repaying the capital
(and interest) is of no concern. These mortgages are ideal for borrowers who are in, or close to, retirement age.

With these types of mortgages, interest and capital are rolled in together. This increases the mortgage debt
annually. But, since repaying the capital usually doesn’t occur until the borrower dies, the increasing debt
is not a major concern.

Some basic qualifications for this type of mortgage include:

• The home can have no other mortgages or liens on/against it
• The homeowner must be a certain age (usually senior citizen age, or close to it)
• Income and credit requirements are usually not considered
  (after all, the equity in your home is the lender’s security).

Of course, there are more stipulations that must be met to qualify for this type of mortgage.
heck with your mortgage broker to see if you qualify. If you don’t want to worry about repaying the
capital on a mortgage in your retirement years, this type of mortgage may be ideal for you.

Repaying the Capital: Interest and Partial Capital

Yet another type of mortgage is one where payment of the capital (principal) of the loan is not due until
the end of the loan.

These loans are commonly referred to as bullet loans or balloon loans (U.S.). These types of mortgage loans are
appealing because, like interest-only loans, they result in low monthly payments initially,
as repaying the capital comes at some time in the future (near the end of the loan).

As repaying the capital comes in a single lump sum at the end of the mortgage term, borrowers need to be extremely
financially disciplined when taking out this type of loan. If you haven’t planned for this large cash outlay,
it can be detrimental when it comes time to make that payment.

Balloon loans are beneficial to borrowers because when repaying the capital deferred, it frees up cash on an ongoing
basis for other endeavours. If you’re expecting an influx of cash, or are disciplined enough to
put aside funds in anticipation of making the final lump-sum payment, a balloon loan is an option you may want to
consider.

Repaying the Capital: Foreclosure and Non-recourse Lending

Foreclosure and non-recourse lending is big business. When homeowners fail at repaying the capital as agreed in
their mortgage stipulations, foreclosure is inevitable. But, it’s not without risk.

When a lender doesn’t sell a property for enough to recoup what is owed on it, he or she has no recourse against the
borrower (hence, the name “non-recourse lending”).