Should I go for a Repayment or Interest Only Mortgage?

There are lots of decisions that we need to make when we are choosing a mortgage. One of the main decisions will be between a repayment or an interest only mortgage. There are pros and cons to both and it will depend on your needs as to which will suit you and so it is a good idea to make sure that you know what they are so that you can decide which will be the best for you.

Repayment Mortgage

With a repayment mortgage you will pay the interest and some of the balance of the mortgage back each month. This means that each month you will reduce the amount of mortgage that you owe and you will be able to see it reducing over time. This is something that some people really like as they love to see that they are reducing their debt. It also means that you will be guaranteed to repay all of the debt by the end of the mortgage, assuming that you are able to make every single repayment.

Interest Only Mortgage

With an interest only mortgage you will only have to pay the interest to the lender and then it will be at the end of the mortgage term that you will repay the actual sum that you borrowed. With these mortgages you will be expected to invest money each month so that you will have enough to repay the mortgage at the end. This will be part of your contract with the mortgage company and they will check with you that this is happening as well. Potentially, it can be a cheaper way to borrow because your investment could make a great deal of money and even if you invest the extra amount you would otherwise be paying on repaying the mortgage, you could end up gaining a lot. Of course, where you invest the money is really important as you will need to make sure that you get back as much money as possible and keep a check on it to ensure that you will have enough left to pay the balance when your mortgage comes to an end.

You can see that there are some big differences between the two types of mortgage and it is important to address a few things while deciding which will work for you –

  • Make sure that you are confident that you will have the self-discipline to make investments for the interest-only mortgage and not spend the money. If you are not confident then go for the repayment.
  • if you are likely to be stressed by owing a huge sum of money and it not going down then have an interest only mortgage will not be wise
  • if you know a lot about investment then you will know where to put money for an interest-only mortgage, but a financial advisor will be able to help as well.
  • An interest only could also be good if you make lots from your investment as you could end up repaying early due to accumulating the funds more quickly, but this will depend on how well the particular investment you choose does over the mortgage term of course.

As well as considering which will work for you, it is important to make sure that you compare lenders. There will be small difference between them in the way that the mortgages work and so there may be other differences that you will need to consider. It is well worth looking into hard because you will need to keep that mortgage for a while and you do not want to regret your decision.