Repayment and interest only mortgages
There are many different mortgages on the market these days, with something to suit most needs and circumstances, but all mortgages come under one of two umbrellas, which are repayment mortgages (also known as capital and interest mortgages) and interest only mortgages. When you are looking for a mortgage you need to decide whether you want to opt for a repayment mortgage, which is the most popular type of mortgage, or an interest only mortgage.
Those looking to take on an interest only mortgage may find that their choices are more restricted, as some lenders try and steer clear of this type of mortgage because of increased risks involved, and therefore you may have a limited choice of lenders. However, in today’s financial climate many people, particularly first time buyers, will struggle to afford repayments on a repayment mortgage, and therefore an interest only mortgage may be the only option for many.
Firstly, before you make a decision on whether to opt for a repayment or interest only mortgage it is important that you learn more about the different mortgages and consider the pros and cons. Your circumstances and needs will help to determine the sort of mortgage that you go for, but a mortgage is a very important, long term commitment and you therefore need to make sure that you know what you are getting into before making any commitment.
Repayment mortgages are the most commonly taken and popular mortgages, and these mortgages are also known as capital and interest mortgages. With this type of mortgage you will make monthly repayments that are allocated in part towards the actual loan that you have taken out, and in part to the interest on the loan.
This means that as time goes on you will see the amount on your mortgage reducing as you continue to make repayments, which is encouraging. Once your mortgage term has ended you should find that your mortgage balance is clear providing your have kept up with repayments.
Another benefit is that you will find far more lenders offering repayment mortgages than interest only mortgages, which means more choice and a better chance of getting a low rate deal. On the downside, the repayments on a repayment mortgage are higher than those on an interest only mortgage.
Interest only mortgages are not as popular as repayment mortgages and are classed as a higher risk by lenders, which is why many now steer clear of offering these mortgages. This type of mortgage is usually more popular amongst younger property purchasers on limited incomes and first time buyers that need to be careful with their budgets.
With an interest only mortgage your monthly repayment are applied towards only the interest on the loan that you took out, which means that over the term of the mortgage you will not actually be repaying any of the actual loan amount that you took out. This means that at the end of the mortgage term you will still owe all of the actual loan amount, although your interest will all be paid providing you have kept up with repayments. You will therefore have to arrange some sort of investment to run alongside the mortgage, which is aimed at raising the money needed to pay off the mortgage loan at the end of the term.
One of the main advantages of this mortgage is that the repayments are lower than repayment mortgages. However, on the downside you have to hope that your sideline investment performs well enough to repay your principal loan balance off at the end of the mortgage term.
