Should you go for an interest only mortgage or a repayment mortgage?
If you have got your head round the types of mortgages available and the different ways that mortgage rates are calculated, now is the time to add what you want to pay off into the mix. Most people assume that when you make monthly repayments to your mortgage you pay off interest and some of the original sum you borrowed. This is true and is known as a repayment mortgage or capital repayment mortgage. There is also a different type of mortgage around known as an interest only mortgage which means that you simply make interest repayments every month and the capital remains the same.
According to a Survey of English Housing conducted by the Office of the Prime Minister, 75% of mortgages taken out are repayment mortgages. This probably illustrates the fact that we are not a risk taking society. Let’s explore these types of mortgages in further depth.
What is a capital and repayment mortgage?
A repayment mortgage is a simple mortgage. All a repayment mortgage means is that you make regular monthly repayments that pay back the interest and some of the capital every month. This means that at the end of the term of the mortgage the house is yours and there will be nothing outstanding to pay.
You should choose a repayment mortgage if:
| | 1. You’re looking for a simple, straightforward easy to understand mortgage
You can afford to make higher monthly repayments than you would do on an interest only mortgage.
2. You want to feel reassured that you are making regular contributions to paying off the interest and the original loan amount.
3. You are wary of long term investments and the thought of house repossession if the investments don’t make enough money to cover the capital scares you to death.
4. You are not a risk taker.
5. After the term of the mortgage ends you want the house to be yours with no hassle or worry. |
What is an interest only mortgage?
The important thing to remember with an interest mortgage only is that you only make interest repayments every month for the term of the mortgage. This does not mean that they mortgage lender will just forget the capital at the end of it all. Once the mortgage has ended, they will want you to pay back the capital in one lump sum. You need to make wise investments in such things as ISA’s and pensions to ensure you can repay this.
You should choose an interest only mortgage if:
| | 1. You want to benefit from substantially lower monthly repayments. After all you are only paying off interest, not any capital.
2. You feel that you can’t afford the monthly repayments involved with paying off capital as well as interest. An interest only mortgage could be your only option to get you on the property ladder.
3. You feel comfortable with the substantial financial risk you are taking. You need to make sure that at the end of the term of the mortgage you will be able to pay back the capital you originally loaned. If you don’t your house will be repossessed. This would involve setting up an endowment mortgage, although these have not proven to perform well enough to cover the capital at the end of the term, or a high interest ISA mortgage which is becoming the increasingly popular method.
4. You are not planning to stay in the property long and are comfortable enough that the market will cushion you with enough profit from the resale to cover paying back the mortgage |
