An annuity mortgage, also known as a repayment mortgage, is the most common type. The lender works out the amount you need to repay each month to clear your mortgage by the end of an agreed term. Your monthly repayment is made up of two parts:
- An interest payment on the loan (will reduce over time)
- A capital repayment (increases over time)
In the early years, most of your repayments will go toward paying off interest on your mortgage. But as your mortgage reduces, the interest part of the repayment goes down. So as time goes on, more of your monthly repayments go toward paying off the capital.
You can usually choose either a variable rate or a fixed rate annuity mortgage or in some cases a mixture of both (known as a split rate).
In the early years of the mortgage period, the annuities mortgage usually has lower monthly payments than a linear mortgage.