What’s the difference between repayment and interest-only?
Most people have a “repayment” mortgage where the monthly repayment is made up of an interest payment plus a payment towards the outstanding debt. At the end of the mortgage term, the borrower will own the property outright.
The alternative is an “interest-only” mortgage. The borrower just pays the mortgage interest each month, not any of the capital debt. At the end of the mortgage term, the initial debt will still be outstanding, so you’ll need to have some way to repay it.
Which is best?
The advantages of repayment mortgages are:
- You pay less interest overall because what you owe decreases every month. Later in the mortgage's term, more of each payment goes towards clearing the balance.
Lower interest rates later in the mortgage term because you can get better deals once your outstanding balance is smaller.
You will own your home at the end of the mortgage term if you make all of your repayments.
However, the monthly repayments will be higher than if you get an interest only mortgage, so make sure you will be able to afford them.
Interest only mortgages
The advantages of interest only mortgages are:
- Lower monthly payments because they only cover the interest.
More flexibility to choose where your money goes. You can decide how you will save to pay back the mortgage balance or use some towards home improvements.
You could make a profit if your investments perform well. You could save up enough to pay off your mortgage more quickly or keep a lump sum to buy something else.
The disadvantages of interest only mortgages are:
- More expensive overall because the amount you owe will not decrease over the mortgage term. This means that the amount of interest you pay will not go down either unless you get a deal with a lower interest rate.
More complicated to look after because your mortgage and the repayment vehicle are separate.
More risky than repayment mortgages if your repayment vehicle performs badly.
If your repayment vehicle relies on investments, pension funds, an inheritance or a rise in house prices, it may not make enough to pay off your mortgage.
Choose which is right for you
Interest only mortgages do not suit most borrowers. At First Class we will discuss the risks and acknowledge your repayment plan to save enough capital by the end of the term.
You would need to be able to make a profit from your investment vehicle and preferably have a backup option to help you pay off the mortgage.
Talk to us today to help you work out if you can afford an interest only mortgage.
Part and part mortgages
You can get a mortgage split between repayment and interest only. Part of each payment you make will go towards the mortgage balance and part will go towards just the interest.
Your balance will go down every month but there will still be an amount left to pay at the end of the mortgage term.
How long should my mortgage term be?
The term is the number of years over which you will repay your mortgage. Traditionally most people took out mortgages on a 25-year term, but it can be anything from five to 40 years.
The longer the mortgage term, the lower your mortgage repayments will be – but the more interest you’ll pay overall.
If you can, it’s best to reduce the term each time you remortgage. So if you took out a five-year fixed rate mortgage over 25 years and remortgaged after five years, it’s a good idea to reduce your mortgage term to 20 years rather than reset it to 25.
What do I do if I am moving home?
If you’re already a homeowner but are moving to a new home, you can often take your existing mortgage with you. This is called “porting” your mortgage, and can be more cost-effective than taking out a new mortgage.
Some mortgage deals permit porting, while others don’t, so check with your lender. Porting your mortgage will still involve undergoing an affordability assessment, a credit check and a property valuation.
Be aware too that if you’re moving to a more expensive property and need to borrow more, you may not be able to, or if you can, you may end up with two mortgages as some lenders will require the additional borrowing to be put on a separate mortgage.
What’s a product transfer?
A product transfer is when you move from one mortgage product to another, for the same amount of money, with the same lender. A product transfer will be quicker and easier than a remortgage.
Should I use a broker?
At First Class, we have access to over 50 of the best known lenders, which means we can find the right mortgage from thousands of mortgage products for your circumstances.
We can also be able to tell you whether a product transfer with your existing lender, or remortgaging to a new lender, will be better for you.
If you’re moving house we can advise you whether porting your current mortgage or taking out a new one is the best option.
Contact Us Today To Learn More!
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR REPAYMENTS