When you take out a mortgage there are two ways of repaying it. You can either go for an interest-only mortgage or a repayment mortgage.
But what’s the difference?
REPAYMENT MORTGAGE:
A repayment mortgage is when each month you pay back both the interest on your loan AND part of the loan itself. This means that by the end of the agreed mortgage term, typically 25 years, you will have paid off the entire debt and will own your property outright.
INTEREST-ONLY MORTGAGE:
An interest-only mortgage is when you only pay back the interest. This means your monthly payments are considerably lower but you will still need to pay off the loan at the end of the mortgage term.
You will need to pay back the remaining balance of your mortgage fully, there are 3 ways to do this:
– Using a repayment vehicle, including any kind of savings plan like an ISA, investment fund or pension
– Using a lump sum, such as inheritance or a pension withdrawal
– Selling the property
WHICH IS BEST FOR YOU?
Typically, interest-only mortgages do not suit most borrowers. It’s vital that you are aware of the risks involved.
The advantages of repayment mortgages:
1. You pay less interest overall
2. You will have access to lower interest rates later on as your outstanding balance decreases
3. You will own your home at the end of the mortgage term
The advantages of an interest-only mortgage:
1. Lower monthly payments
2. More flexibility
3. You could make a profit if your investments perform well
The disadvantages of an interest-only mortgage are:
1. More expensive overall
2. More complicated
3. More risky
Typically, an interest-only mortgage is used when purchasing an investment property (Buy to Let) as the objective for the purchase is different from buying a property to live in.
There are a number of factors to take into consideration when applying for a mortgage. It’s always advisable to speak to someone who can look at your individual situation and help you find the best possible option.
Speak to one of our advisers to work out which is the best option for you.