When we speak with our mortgage clients, we often discuss the two main ways to pay off a mortgage – repayment mortgage vs interest only. We often find that one option suits your financial situation better.
When you have a mortgage, you can have either a repayment mortgage or interest only. A repayment mortgage means you have monthly payments that go towards paying some of the mortgage balance as well as paying the interest owed on it. This usually means in the monthly repayments being higher than if you get an interest only mortgage. The monthly amount is calculated so that you pay off the full amount owed by the end of the mortgage term which is usually around 25 years. Once you repay your mortgage fully, you will own your property outright.
Interest only mortgages
With an interest only mortgage, your monthly repayments pay the interest on your mortgage and not on reducing the total amount you owe. This means the monthly repayments will be lower but you will still owe the same amount at the end of the term of the mortgage.
Repayment mortgage vs interest only – the advantages
With a repayment mortgage you pay less interest overall because what you owe decreases each month. You will have lower interest rates later in the mortgage term because your outstanding balance is smaller. You will also own your home at the end of the mortgage term if you make all your repayments.
The advantages of an interest only mortgage is that you will have lower monthly payments because they only cover the interest. You will have more flexibility to choose where you save your money to pay back the mortgage balance. You may also decide to make investments so you could save up enough to pay off your mortgage more quickly.
Decide the right mortgage for you
IInterest only mortgages do not suit everyone and you must be aware of the risks associated with interest only mortgages. It is your responsibility to ensure that you have a repayment plan in place to save enough capital by the end of the term to repay the outstanding mortgage. At the end of the term you must have enough savings to repay your outstanding mortgage.
If you are currently looking for a mortgage and would like advice in this area, then please get in touch and one of our mortgage brokers will be able to suggest the best option for your financial situation.
*Please note: Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.