Interest Only Mortgages and Repayment Mortgages - Which Is Best?

When it comes to searching for mortgages for first time buyers, it can be a daunting experience choosing the right mortgage; you are making a decision that will in all probability affect your life for the next twenty five years. So achieving the right choice to get the right mortgage rate to suit your conditions is a choice to be made cannily, for many that choice will come down to a choice between an Interest Only Mortgage or a Repayment Mortgage.

What is a Repayment Mortgage? Under a Repayment Mortgage you will be paying a combination of both the interest and the capital every month. Throughout the first few years, the majority of your monthly payments will be going on the interest with a sparse amount of the payments covering the capital. However as time progresses, a larger sum will be paid, and the more capital paid off, the less the interest becomes with each passing year. With the fixed terms end you will fully own your house, having completely paid both the capital and interest. What is an Interest only Mortgage? With the Interest Only Mortgage (IOM), as the name suggests, only the mortgage interest will be paid every month, with the capital payment intact. Under this type of mortgage your monthly payments will be less than on a Repayment Mortgage, though the notion is you should be making a second monthly payment into an investment vehicle so at the end of the fixed term, you can pay the capital off in a lump sum to the mortgage lender.

Repayment Mortgages- Pros and Cons: Repayment mortgages are the safe option in essence, so it's no wonder that they are the most popular type of mortgage in Britain. As you pay off the mortgage, you're infusing equity in the house and are more unlikely to see the property go into negative equity under the Repayment Mortgage, so when/if you decide to move house, it will be so much easier with equity in your current property. While the payments are not as flexible as an IOM, you have the capability to modify the fixed term length of the mortgage at a forthcoming date to even 30 or 35 years to keep the monthly payments down to a manageable level. It should also be pointed out that several, not all; Repayment Mortgages will allow you to make lump sum payments if you come into a sum of money at a future date. The drawbacks; any amendments in the mortgage agreement, i.e. extending the fixed term or even making an further lump sum payment, could result in the mortgage lender making a fee to sort out the changes, what the charge is will depend on the mortgage lender but it should not be too severe.

Interest Only Mortgages and Repayment Mortgages - Which Is Best?

Interest Only Mortgages- Advantages and Disadvantages: With IOMs, the positives and negatives are related; many of the subjects involved are two sides of the same coin. For instance, IOM's are more vulnerable to market forces than Repayment Mortgages are, but depending on what the market is doing it can be a boon or a bother. An interest rate rise would be the best example, a £100,000 mortgage over 25 years with an interest rate change of 1% would lead to an increase of £65 on a repayment mortgage, but £84 increase on an interest only mortgage. Yet the benefits are as embraced as the drawbacks are not, if interest rates go down by 1%, the payments fall by the same quantity as stated above. Not only can the payments vary over a far ranging spectrum than Repayment Mortgages, but the monthly repayments are more bendable than on a Repayment Mortgage, as you are only paying the interest on the mortgage, the payments each month are lower, on a £100,000, 25 year mortgage for instance you would be saving 2k a year on mortgage repayments. What is not advertised about an IOM is that in truth you should be saving into a secondary investment vehicle, generating enough cash so at the closing of the mortgage, you can pay the lump sum, which is the actual capital, off to the mortgage lender. So an IOM is if truth be told, only cheaper if you if you decide not to make the second payment, some people do go down this route, gambling on the expectation that by the time it comes to pay the lump sum off, house prices would have risen enough to pay off the mortgage and have enough left over to scale down into a smaller house. It's easy to forget the fact that all other property prices will have increased also, risking any profit you had created not being enough to even scale down. The only time gambling on house price inflation is expected to work is if the property is a buy-to-let, as you would be profiting on and covering the rent, and could then sell the property to repay the capital, another factor is that if interest rates are as low as they are at present, those on IOMs don't by and large realise they should be making further payments into the investment vehicle to make paying the lump sum off easier in the future. An IOM also results in you in reality paying more cash over the 25 years than a Repayment Mortgage; those on a Repayment Mortgages are paying capital which reduces interest over time, IOM capital is unchanging as the capital is not being reduced. Which leads to the final downside of an IOM, the property will not gain any equity during the time of the mortgage.

Interest Only Mortgages and Repayment Mortgages - Which Is Best?

As you can see there is more to deliberate regarding IOM's as the inconsistent factors can be much greater than with Repayment Mortgages, when we get down to the bottom line, the choice comes down to if you would rather be more prudent with a Repayment Mortgage, or be ready to speculate and go for the Interest Only Mortgage. You would not be fixed into the mortgage deal as it is when you sign up; both are accommodating in their own ways, the IOM just has added stretch. If you are put off by the risk of an IOM, it is possible to switch over to a Repayment Mortgage after a certain period of time. IOM's are more appealing as they are of more of help getting first time buyers onto the property ladder, if this is your objective, then it is seriously worth considering, if it's a long term consideration, then make sure you have an investment plan in place to pay the capital or it could be a expensive mistake to regret.