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Interest only mortgage vs Repayment mortgage

Interest only mortgage vs Repayment mortgage

 

Taking out a mortgage is arguably one of the biggest and most important decisions you’ll make in your whole life. If you’re new to it there’s a whole load of terms and abbreviations that you’ll need to get to grips with. However one of the most straight forward decisions you will need to make is whether to take an interest only mortgage vs repayment mortgage.

Interest only mortgages have become far harder to get hold of in recent years, as lenders and view them as riskier than repayment mortgages. Some lenders have withdrawn from offering interest-only mortgages except for buy-to-let mortgages, while others will offer them BUT will ask for a large deposit or equity, often 50% or more – which is often completely unrealistic or unachievable.

 

Interest only mortgage vs Repayment mortgage

Interest only mortgage vs Repayment mortgage

So what’s the actual difference??

Interest only as the name suggests – means you only pay off the interest on the loan.

When you take out an interest-only mortgage, you are supposed to also make a monthly payment into an Individual Savings Account or another investment. The idea is that the investment will then generate sufficient returns to pay off the capital sum you still owe at the end of the mortgage term.

There is no guarantee of this, so any interest-only mortgage carries an element of risk.

Interest only mortgages are significantly cheaper month to month than a repayment mortgage and that is why many opt for them. The thought of ‘having to deal with a financial problem 25 years down the line” is often swept under the carpet as long as it allows the purchaser to buy their property.

Repayment mortgages encompass both the interest part of the mortgage and actually paying off your property. If you keep up all the repayments on your mortgage, you are guaranteed to have paid off the mortgage at the end of the term. Obviously taking out a repayment mortgage will mean you are paying more each month and affects your disposable income.

Interest only mortgage vs Repayment mortgage

So what should you choose??

We can’t answer that for you. Many factors come into play when choosing your mortgage.

Whether you choose interest only or repayment you still must choose how long you are committing to that agreement, are you fixing a rate for a period because you are happy with it now, or gambling on  a tracker staying low – these calls will differ from person to person.

 

Interest only mortgage vs Repayment mortgage

Spend time researching what options are open to you and what your plan is over the next 5-10 years as making the wrong call on your mortgage could set you back financially and ultimately waste your time. Talk to your bank and also arrange a consultation with an independent broker to cover as many options as you can.