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Interest only or repayment

Interest only or repayment

It’s not the most glamorous topic in the world we admit but it is one that most likely you will have to endure at some point in your life.

So what’s the best option to choose, does it really matter and what’s involved? We’ll take a quick look below.

Interest only or repayment

A repayment mortgage for a residential property purchase is most peoples choice when buying their property. It is a sensible choice and allows you to eat away at repaying your mortgage. If you stick to paying your payments as in your mortgage agreement , at the end of your chosen timescale, your mortgage debt will be cleared and you will own your home outright.

Generally you will find a greater choice from lenders when looking at repayment mortgage products.interest only or repayment

Lenders have far stricter criteria with interest-only mortgages.

Due to the very nature of the product – ie you are only paying back the interest, not the capital, the lender will look for security in that you are able to clear the capital at the end of the mortgage. A minimum £150,000 equity in the property is required for some lenders though not all, and where any part of the mortgage is on an interest only basis, the maximum loan you will be able to borrow is 75%. When looking at interest only products it is paramount to ensure that a repayment vehicle is in place to ensure funds will be available to repay the mortgage when the term expires. Hoping for the property to rise in value is not a safe approach and one that the lender will likely not accept.

Interest only or repayment

Of course the upside of an interest only mortgage is that the monthly payments are far less. Your life circumstances may value this as of higher importance short term, or you may have other means in place to pay the capital at the end of the mortgage. There are obviously many factors to take into account when deciding what is right for you.

Interest-only mortgages for residential purchases are no longer usually availalable, but where interest-only is acceptable is on a buy-to-let property, which cannot be your home. This is  viewed as an investment. The downside of this, of course, is that unless you sell the property, the actual mortgage will never be cleared.

The safer approach is a repayment mortgage rather than interest-only. For buy-to-let, it depends on a lot of factors such as affordability, tax implications and how long you are likely to hold on to the property.

There are many independent mortgage advisors out there who will offer impartial advice on the different options out there but ultimately it is down to you to decide what works best for you.

 

Interest only or repayment – 23/10/17