Bullet repayment loan

In a typical loan arrangement, the borrower commits to repay interest and principal on a regular basis so that the loan is cleared over its term. This is the structure of a repayment mortgage. Each monthly repayment consists of a bit of interest and a bit of capital. The split varies – in the early years the majority of each payment is interest to reflect the large amount of capital outstanding. In the latter years, most of every repayment is capital.

However, there is another type of mortgage where the repayment pattern is different – the interest-only mortgage. Here, the borrower just pays off interest charges on a monthly basis. As such, the repayment to the lender is smaller. Then, at the end of the term of the loan – say 25 years – the capital is repaid in one chunk.

This is also known as a ‘bullet repayment loan’. The lender will normally expect the borrower to have a savings plan in place from the start of the loan that will fund the final repayment of capital.

• See Tim Bennett’s video tutorial: Beginner’s guide to mortgages.

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.