What is the Difference Between Repayment and Interest-Only Mortgages?

There are lots of different mortgages available and when you are trying to choose between them, whether you are a first-time buyer or are looking to remortgage, it can get quite confusing. It can be a good idea to have an understanding of the main differences between the different mortgage types and this will allow you to be able to make the decision more easily. There are several ways to classify mortgages and one is repayment and interest only. It is good to know what these are and what the advantages of them are and then you will be able to decide which will be the best for you. 

What is a Repayment Mortgage?

 A repayment mortgage refers to a mortgage where each month you will be required to pay the interest as well as some of what you owe. This means that the amount of mortgage that you owe will reduce each month and you will be able to see the balance reducing. The amount of interest that you are charged will also go down because you will owe less money. This means that to start with, most of what you repay will probably be interest as you owe so much but as you start to repay part of the mortgage the interest will go down and towards the end of the term, you will be paying back more mortgage than you will be paying in interest. 

What is an Interest Only Mortgage?

 An interest-only mortgage requires you to only repay the interest each month, just like you would with a payday loan as can be found here. This means that you do not have to repay any of the money that you have borrowed initially. You will be expected to invest money or find other ways to get the money so that you can repay everything that you owe at the end of the term. This type of mortgage will give you the flexibility of choosing where to invest your money so that it increases in value and you will have enough to repay what is needed after the term of the mortgage. This can be risky, as all investments have a risk that you will not make much money from them, but if you invest for a long time that risk is lower. People will often use a financial advisor to guide them as to what they can invest in so that they make a sensible decision and hopefully have enough to repay. The bank will also check at regular intervals to make sure that you are capable of repaying as well. 

Advantages of a Repayment Mortgage

 A lot of people like the fact that with a repayment mortgage there will be a guarantee that you will have the mortgage repaid when the term is up. They also like knowing that they are repaying a chunk of the mortgage each month and so they are whittling down the amount that they owe as it gives them a good feeling to know that it is going down. They also like the security of a repayment mortgage, knowing that they will not have to take the risks associated with an interest-only mortgage and investments that are normally made alongside it. They may also worry that with an interest-only mortgage, they will be tempted to only pay the interest and not invest anything as they will have extra money to spend then and this could get them into trouble in the future.

Advantages of an Interest Only Mortgage

 There is more flexibility with an interest-only mortgage. It means that if you only have to pay the interest, that you can choose how much money to put by towards the mortgage each month. You may therefore choose to invest more money some months than others to allow yourself extra money for spending elsewhere when you need it, but obviously, you will need to make sure that you have enough to repay the mortgage. There is also a chance that, if you invest each month, that by the time you need the money to repay the mortgage there will be more available than you need. If the investment has done really well, then you might want to withdraw the money early and repay the mortgage early, if you can. 

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