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Only Vs. Repayment Mortgage: What Is The Difference?

When taking out a mortgage, you need to decide how you will repay it, you could choose repayment, or you could choose interest only. It totally depends on your preference. If you have a mortgage on 180000, you might decide it works better for you to choose repayment, where someone else may choose interest only. 

With interest-only mortgages, the monthly payments only cover the interest charged on the loan, however, with a repayment mortgage, the monthly payments also pay back the sum you initially borrowed. 

So, which option should you pick? It totally depends on you, but we are here to help you. We will go over the differences between these two options as well as their pros and cons, so you know what you are getting into with your finances.

What Is A Repayment Mortgage?

Let’s start with a repayment mortgage, and what this means if you choose this option. This will be the larger sum payment. You will make monthly repayments based on an agreed time period until you have repaid back the capital and interest that you owe on the mortgage.

In this case, the amount owed will decrease each month when you make a payment, and, so long as you keep your repayments up, the mortgage will end up being fully paid off by the end of the term. 

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Once you have a fully paid-off mortgage, this will mean that the home is then yours, and you will also have a sellable asset too. This makes it a long-term investment. However, depending on the property cost, and term of the mortgage, it could take some years to pay this off.

Pros

  • Potential decrease in interest over time: The interest rate you pay may end up being less, as what you owe will decrease on a monthly basis. Later on in the term of your mortgage, more of each of your payments will contribute to lowering your balance, which in some cases can result in a lower interest rate. 
  • Lower interest rates over time: As you pay off the mortgage, you can also become eligible for interest rates which are lower, however, this depends entirely on the mortgage lender and your individual situation. 
  • Long-term security: The security of the end result, owning your own home, should you make all of your repayments on time, is highly beneficial.

Cons

  • Higher payments: Monthly payments will end up being higher than if you decided to choose a mortgage based on interest only. Online mortgage calculators are available to help you work out just how much the monthly payments would likely be.

What Is An Interest-Only Mortgage?

Interest-only mortgages are when your payments are less, however, you will still owe the set amount borrowed. 

In order to own the property by the end of the mortgage term you will have to repay the whole balance. This can be done in two ways. 

You could use a repayment vehicle, this could be an investment you have alongside your mortgage, which includes any form of savings plan, such as pensions, ISA, investment fund, and so on. 

You could also use a lump sum that you gain before the end of the mortgage. 

However, be aware that mortgage lenders will typically ask you about how you intend on repaying the loan, and not every lender will accept all types of repayments, some may not accept inheritance for example.

Lenders will all have their own criteria to meet, so you should always speak to a mortgage expert beforehand if this is the route you wish to take.

Pros

  • Low monthly installments: Your monthly payments will be lowered, as you are only paying back interest on the loan.
  • More investment control: You have more control over your investments, so you can decide how you save to be able to repay the mortgage capital amount. 

Cons

  • Continual Interest: As the capital does not decrease, the interest is likely to remain the same amount for the whole term.
  • You still owe: Once the mortgage term ends, you will still owe money to the lender for the original borrowed amount. While repayments are smaller, you need to plan for how you will repay the capital.
  • More risk: There is a higher overall risk in the case that your vehicle for repayment ends up performing badly. If you were to use savings for example, there is no guarantee that it will remain stable enough for you to repay the loan at the end. 

Overall

The difference between only and repayment mortgages is in the capital and interest structure. On one hand you repay only the interest monthly, on the other you repay the total amount monthly.

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