Repayment VS Interest Only – Which One Is Right For You?

Repayment VS Interest Only – Which One Is Right For You?

When it comes to arranging a mortgage, you can opt to repay your mortgage in two ways: Repayment or Interest Only. Each repayment type has its own pros and cons, and the best choice for you will depend on your individual financial situation and personal goals.

Repayment Mortgages

These are the most common type of mortgage in the UK. With a repayment mortgage, you make monthly payments that go towards both the interest on the loan and the repayment of the capital. Over time, your outstanding balance decreases and you build equity in your home in the process.

Pros

1. Your mortgage will be fully repaid at the end of the term.

2. You build equity in your home over time.

3. It’s easier to budget as your payments remain relatively stable over the term of the mortgage.

Cons

1. Monthly payments are usually higher than an interest only mortgage.

2. It can be difficult to switch to an interest only mortgage later into the term.

3. You may have to extend the term of the mortgage to lower your repayments if they no longer suit your budget.

Interest Only Mortgages

With an interest only mortgage, you only pay the interest due on the loan each month and no capital is repaid. This means that at the end of the term, you’ll still owe the full amount that you borrowed originally. To repay the loan, you need to commit to a repayment strategy such as selling the home or utilising funds from another source.

Pros

1. Monthly payments are usually lower than a repayment mortgage.

2. You have the flexibility to switch to a repayment mortgage later on.

3. You can use the money that you save on monthly payments to invest in other opportunities.

Cons

1. Your mortgage will not be repaid at the end of the term.

2. You don’t build up as much equity in your home over time.

3. There is a risk that you may not have enough money to repay the loan when it’s due at the end of the term.

When choosing between a repayment and an interest only mortgage, it’s important to carefully consider your individual financial circumstances and future goals. If you want the security of knowing that your mortgage will be fully repaid at the end of the term then a repayment mortgage is likely to be the better choice. If you’re looking to save money on your payments or want the flexibility to switch to repayment at a later date, an interest only mortgage could be a good option. It’s important to remember that with an interest only mortgage, you need to have a plan in place to repay the loan in full when it’s due. Regardless of which type of mortgage repayment you choose, it’s a great idea to seek advice from a mortgage broker to ensure you’re making the right decision for your individual circumstances and that the type of mortgage you’d like is available to you from a mortgage lender.

The Mortgage Lodge January 2023