Repayment Choices
Interest Only
Interest only mortgages requires you to make monthly payments to the mortgage lender in order to pay off the interest on the amount borrowed. In addition to the interest only mortgage you need to establish a separate long term repayment strategy.
This could include an investment plan, inheritance or disposing of the property in the future.
The investment plan required to pay off the mortgage usually comes in one of three forms; an ISA (individual savings plan), a pension or an endowment. This investment does not have to be provided by the mortgage lender.
Interest only mortgages can also be changed to a repayment mortgage in the future. This is becoming increasingly popular with first time buyers who find it hard initially to afford the mortgage payments. Several lenders are now actively offering interest only mortgages to first time buyers as a specially designed product. However many lenders offer the main mortgage products on an interest only basis. It is important to remember that taking an interest only mortgage with a view to changing to a repayment mortgage in the future may incur a small fee from you lender.
Advantages:
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Disadvantages:
You can choose an 'investment vehicle' that is tax efficient.
-If the investment growth rate exceeds those estimated at outset you may be able to pay off your mortgage early or receive a lump sum at the end of the repayment period, in addition to paying off your mortgage.
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Capital and Interest
Repayment mortgage, (capital repayment) is a mortgage where you make monthly payments which contribute towards the total amount borrowed and the interest payable. Repayment mortgages are repaid over a specified period. Assuming you continue to make all your monthly contributions in full, the mortgage is guaranteed to be paid off in full at the end of the arranged mortgage term.
During the early years of a repayment mortgage, the majority of each monthly payment goes towards paying the interest owed. The amount paid off each year increases as the mortgage term progresses.
Repayment mortgages are the most popular form of mortgage, it is worth remembering that when budgeting your monthly payments on a repayment mortgage that the term taken at the outset can be changed in the future. Many customers are now taking repayments mortgages over 30 of even 35 years to keep their monthly repayments low in the initial years. A repayment mortgage term can be changed simply by contacting your mortgage lender in the future as and when you feel you can afford to increase your monthly repayment mortgage payments. It is important to remember that your mortgage lender may charge a small fee to change the term of your repayment mortgage.
Advantages:
No guarantee that you will have sufficient funds to pay off the mortgage at the end of the repayment period, as the investment could perform below that assumed at the start.
-Your debt remains constant throughout the mortgage period.
-Some forms of investment may incur a penalty fee if you stop paying premiums.
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Disadvantages:
Guaranteed to pay off your mortgage in full by the end of the repayment term, provided that you make all the required monthly mortgage repayments.
-You are less likely to suffer from negative equity because your mortgage balance will be reducing month on month.
-Assuming your property has not dropped in value, as the capital repaid increases you will see an increase in the level of equity in your property. Consequently, when you re-mortgage or move home you may find it easier to obtain a mortgage.
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Because very little of the amount borrowed is paid off in the early years of the mortgage, if you were to move again in those early years it is likely that you would need to take out a new 20/25 year repayment mortgage, in order to make monthly repayment amounts manageable. ie. the period for paying off your debt could be extended.