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Repayment Mortgage
A repayment mortgage works in the same way as most types of loans. You make a regular monthly payment to the lender, and the payment is made up from capital (i.e. repaying the money you've borrowed) and interest. In the early years the payments may be mostly interest so the amount you owe may reduce slowly. However, providing you keep up the appropriate payments, at the end of the term you will have repaid the loan in full.
Interest Only Mortgage
With an interest only mortgage, you pay only the interest to your Lender. Pure interest only is sometimes possible but normally you would need to make a separate payment into some sort of savings plan, so you can build a lump sum to pay off the mortgage at the end of the term. The three main types of savings plans are: endowment policies, ISAs and pension plans.
Whichever savings plan you choose, it is vital you keep up the contributions and also make sure your policy is regularly reviewed to ensure it is on target to repay the mortgage at the end of the term. It is important to remember that these types of investment are long term commitments and are unsuitable for people who might not be able to maintain their payments until the end of the term.
If no savings plan was in place, at the end of the term you will still owe the original amount borrowed.
Combination Mortgage
Some Lenders may allow you to combine both repayment methods. For example, if you took out an interest only mortgage for your first home for £100,000 and you are looking at purchasing your second home at a cost of £150,000, you may want to keep your existing savings plan until the policy matures but borrow the additional amount as a repayment mortgage.
Term of the Mortgage
Deciding on the number of years (the term) for which the mortgage should run is an important factor when choosing a mortgage as it effects the amount paid each month and the total amount payable to the lender. Lenders will usually allow terms from 5 to 40 years.
The shorter the term, the higher the payments, but the less interest you will end up paying. For repayment mortgages the monthly payments will simply decrease the longer the term but for interest only mortgages the monthly payment will not change whatever the term, but you will pay more into your chosen savings plan the shorter the term. |
