What are the Differences Between Repayment and Interest Only Mortgages?

What are the Differences Between Repayment and Interest Only Mortgages?

There are two different types of mortgages that we might hear about and these are repayment and interest only. We will often find that if we speak to different people then they will be totally convinced that one of these is the best. However, what is best for one person might not be best for another and we may find that our circumstances will change and we will need to have a look at whether we need to change it. However, the first step is to have a good understanding of what they are and then thinking about when they might be useful to use.

What is a Repayment Mortgage?

With a repayment mortgage you will have a monthly payment where you will pay the interest and also repay a bit of the mortgage. This means that during the term of the mortgage you will pay off bits of the mortgage so that by the time the mortgage term ends you will have completely repaid it all.

What is an Interest Only Mortgage?

With an interest only mortgage you will only pay back the interest each month. This means that you will not repay any of the money that you have borrowed. The lender will ask you to make some arrangements though, to make sure that when the mortgage term is up that you will have the funds available to repay the money that you borrowed. This used to be done by investing in an endowment but these days people might choose to use a stocks and shares ISA or a different investment. Investing is not easy and so many people will use a financial advisor who will let them know what they should be doing. They will be able to find them an investment that will calculate will be able to raise the necessary sum of money and they will also keep an eye on this and if they feel that it is not doing as well as planned, they will advise their clients to start investing more or to move their money. This might sound tricky, but they know what they are doing and you could also do some research yourself so that you come up with an investment plan.

When Should I Use Them?

Some people like to know that they are repaying the money that they have borrowed and are whittling down that loan and so find a repayment mortgage is for them. Some people are worried about investing and do not trust it or feel scared that they might lose their money and so also favour a repayment mortgage. However, some people are happy with investments and feel that they will be better because they have a chance of making more money than they need so they could actually repay the mortgage early or have some money left to spend on other things.

Some people do not have such good reason though. Some people like the idea of an interest only mortgage because they plan on only repaying the interest and not worrying about repaying the loan. This is not a good approach because it means that when the mortgage term is up, they will have to sell the house to repay what they owe. Although this might seem okay in theory, there is a risk if the value of the house has not gone up very much. They will also be left with nowhere to live and although they may have some money left over form the sale of the house to put towards another, it may not be enough to buy one outright and they may struggle to get another mortgage if they are close to requirement age.


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