Once you have chosen your mortgage, there are two ways to repay the loan: interest and capital repayments, or interest-only repayments. Capital is the money you have borrowed from the lender, while the interest is what you are being charged for the loan.
A repayment mortgage is often the most common method of paying back mortgages. The repayments you make on the mortgage are made up of a combination of capital and interest, and so the monthly payments tend to be higher than an interest only-mortgage. But the benefit is that as you are paying off both the capital and interest, by the end of the mortgage term you will own the house outright with no mortgage debt to pay off. This method of repaying your mortgage is a lot more straightforward and less risky than interest-only mortgages.
With interest-only mortgages, you only repay the interest that’s built up, and so when your mortgage term ends you will still owe the capital you were loaned. As you are only paying back the interest the monthly payments are lower than those of capital and interest repayment mortgages. Most lenders will want some reassurance that the loan can be repaid at the end of the term, and so they often want to see you have a strategy in place such as an investment plan.
Since the start of the worldwide credit crunch in 2009, interest only mortgages have been less in favour with mortgage lenders as they are more risky. Although every now and then you may find a new interest only mortgage launched in the market, many major lenders have withdrawn their interest only offerings. It remains to be seen whether they will eventually come back onto the market in a big way.
Seeking professional advice is often the best way to find the right repayment method for you. A mortgage adviser will be able to help to explain the mortgage repayment options available and recommend the best solution for you.
If you have decided to choose an interest-only mortgage a financial adviser can discuss your capital repayment strategy options, whether that includes setting up an ISA, using an amount of your pension, or setting up an alternative investment.
Question you might like to ask your mortgage broker or IFA…
- What kind of mortgage is best suited to my personal circumstances?
- How much will I owe the lender at the end of the term and how will I cover that debt?
- Will the amount I owe increase or decrease over time?
- Are there penalty charges involved for repaying my mortgage early?