Interest-only Vs Repayment Mortgages

There are various methods of repaying the amount you have borrowed from your Mortgage lender- the “repayment” option, and the “Interest-only” option.

Repayment Mortgage:
With this option your monthly payments gradually pay off the amount you borrowed, as well as paying the interest on the loan. If you stick to every payment, you would have paid off the loan at the end of the Mortgage term (usually 25yrs).

Interest-only Mortgage:
Your monthly payments will NOT pay off any of the capital. So whatever you borrowed, will have to be paid back at the end of the mortgage term. It is up to you to make sure you have enough money to repay the mortgage in full, otherwise you could lose your home. This option is mostly popular with buy to let investors. Reason being is that investors hope that the equity of the property will increase, therefore once they sell the property, they can pay off the mortgage, and then keep the change. In the mean time, the tenant of the buy to let property will be paying off the interest of the loan for you.

If interest rates rise, this usually reflects on your monthly payment. Your monthly payments will usually increase. However, this applies to both Interest-only and repayment Mortgages.

Which is more suitable for you?
If you want to be absolutely sure that your loan will be fully repaid by the end of your mortgage term, then the repayment option is for you. You don’t need to be too concerned if the property market dips a little.

If you’re comfortable with taking a risk, hoping that your property will increase in value, then I recommend you take the Interest-Only policy. This option is definitely most popular with Buy To Let investors, as monthly costs are cheaper, and the tenants will pay off the Interest for them. However, if the property market does crash when your mortgage term is over, and you don’t have enough money to pay off the mortgage, be prepared to dig deep into your pockets, as the sale of the house will not cover the entire cost of the loan.

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Changing Mortgage Repayment Method - Property Investment wrote, on Oct 22nd, 2007

	[...] between Interest-only and repayment: Here’s an article on the differences between Interest-Only Vs Repayment Mortgages, including the advantages and disadvantages of [...]
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