Interest Only And Repayment Mortgages

If you are thinking of taking out a mortgage there are a number of important decision that you will have to make in order to ensure that you make the right choice and that you get the best deal for your needs and circumstances. Whilst the number and range of mortgage products has plummeted over the past year due to the global credit crunch, there are still different mortgage types available, and you should make sure that you research the different options or even speak to an independent financial advisor in order to get some advice on choosing the right mortgage. Your mortgage is one of the biggest financial commitments you are ever likely to make, so it is vital that you make the right choice.

One of the choices you are going to have to make is whether to go for an interest only or a repayment mortgage, and there are key differences and pros and cons to both of these mortgage types. Whilst the repayment mortgage is the more straightforward of the two interest only mortgages have been gaining popularity over recent months, as struggling homeowners try to cut their repayments and outgoings in what has become a very difficult financial climate. There are many different mortgage products to choose from and all of these come under the umbrella of either a repayment mortgage or an interest only mortgage.

Repayment mortgages

The repayment mortgage is also known as a capital and interest mortgage, and your monthly repayments on this type of mortgage are split between the interest on the loan and the actual loan itself. Over the term of the mortgage you will see the balance on your mortgage going down, and by the end of the mortgage term you should have paid off the interest and the loan in full. The advantages of this type of mortgage include the fact that you can see your mortgage balance going down over time, and that at the end of the mortgage term the house or property will be yours and your mortgage will have been paid off. On the downside, the repayments on this type of mortgage can be very high, and this is because you are making repayments on both the interest and the principle loan.

Interest only mortgages

An interest only mortgage is classed as higher risk by many lenders, although these mortgages used to be very popular, and have started to gain popularity again, as people try and reduce their monthly outgoings as much as possible. With the interest only mortgage your monthly repayment is allocated towards the interest on the loan but nothing is paid towards the actual loan itself. This means that at the end of the mortgage term you will have repaid all of your interest but you will have paid nothing on the principle loan, and will have to find the money to settle that. You therefore need to have a sideline investment running alongside the mortgage, and you have to hope that the money you put into this will grow to a level that will allow you to repay your mortgage loan at the end of the mortgage term.

The good thing about interest only mortgages is that the monthly repayment is far lower because you are only making repayments on the interest on your loan. On the downside you could find that at the end of the mortgage term your investment does not cover the amount that you owe on your mortgage loan.