Comparing Interest Only Mortgages and Repayment Mortgages
Comparing Interest Only Mortgages and Repayment Mortgages
When it comes to searching for mortgages for first time buyers, it can be a daunting experience choosing the right mortgage; it is a decision that will shadow you for the next 30 or so years. So achieving the right choice to get the fitting mortgage rate to suit your conditions is a choice to be made astutely, in the end the choice will come down to two, a Repayment Mortgage or an Interest Only Mortgage.
What is a Repayment Mortgage? With a Repayment Mortgage, the name should give it away really, every month you will pay off a mixture of interest and capital. In the first few years, the greater part of your monthly payments will be going on the interest with a meagre amount of the payments covering the capital. Yet as time progresses, a larger sum will be paid, and the more capital paid off, the less the interest becomes with each passing year. By the end of the fixed term, the entire mortgage and interest will have been paid off and you'll be the proud owner of your very own house. What is an Interest only Mortgage? With the Interest Only Mortgage (IOM), as the name suggests, only the mortgage interest will be paid every month, with the capital payment intact. With an IOM, the monthly payments will be lower than they would be on a Repayment Mortgage, though the concept is you should be making a second monthly payment into an investment vehicle so at the end of the fixed term, you can pay the capital off in a lump sum to the mortgage lender.
Repayment Mortgages- Pros and Cons: In Britain, Repayment Mortgages are the most populous and most used type of mortgage for the simple fact they are the safest type of mortgage. As you pay off the mortgage, you're infusing equity in the house and are more unlikely to see the property go into negative equity under the Repayment Mortgage, if you decide to move it should be easier to gain a new mortgage on the next property with that equity in your house. While the payments are not as flexible as an IOM, you have the capacity to change the fixed term length of the mortgage at a forthcoming date to even 30 or 35 years to keep the monthly payments down to a manageable level. It should also be pointed out that quite a few, not all; Repayment Mortgages will allow you to make lump sum payments if you come into an inheritance of money at a future date. The negatives; any adjustments in the mortgage agreement, i.e. extending the fixed term or even making an extra lump sum payment, could result in the mortgage lender charging a fee to handle the changes, what the cost is will depend on the mortgage lender but it should not be too awful.
Interest Only Mortgages- Advantages and Disadvantages: With IOMs, the advantages and disadvantages are linked; many of the subjects involved are two sides of the same coin. To use an example, IOM's are more vulnerable to market forces than Repayment Mortgages are, but depending on what the market is doing it can be a godsend or a curse. Let's use an interest charge as a example, a 100,000 mortgage over 25 years with an interest rate change of 1% would lead to an increase of 65 on a repayment mortgage, but 84 increase on an interest only mortgage. Yet the gain are as wanted as the negatives are not, if interest rates go down by 1%, the payments fall by the same quantity as stated above. Not only can the payments oscillate over a far ranging spectrum than Repayment Mortgages, but the monthly repayments are more bendable than on a Repayment Mortgage, as you are only paying the interest on the mortgage, the payments each month are lower, on a 100,000, 25 year mortgage for instance you would be saving 2,000 a year on mortgage repayments. What is not promoted about an IOM is that in actuality you should be saving into another investment vehicle, generating enough capital so at the conclusion of the mortgage, you can pay the lump sum, which is the actual capital, off to the mortgage lender.
So an IOM is if truth be told, only cheaper if you if you decide not to make the second payment, some people do go down this route, gambling on the hope that by the time it comes to pay the lump sum off, house prices would have surged upwards enough to pay off the mortgage and have enough left over to downsize into a smaller house. It should not be forgotten that it's not just your property price that has risen; all other property prices will have shot up also, risking any profit you had produced not being enough to even scale down. The only time gambling on house price inflation is expected to work is if the property is a buy-to-let, as you would be earning on and covering the rent, and could then sell the property to repay the capital, another factor is that if interest rates are as low as they are currently, those on IOMs don't by and large realise they should be making extra payments into the investment vehicle to make paying the lump sum off easier in the future. An IOM also results in you actually paying more cash over the 25 years than a Repayment Mortgage; those on a Repayment Mortgages are paying capital which decreases interest over time, IOM capital is unchanging as the capital is not being paid off. Which leads to the final disadvantage of an IOM, the property will not gain any equity during the time of the mortgage.
As you can see there is more to deliberate regarding IOM's as the erratic factors can be much greater than with Repayment Mortgages, when we get down to the bottom line, the choice comes down to if you would rather be more prudent with a Repayment Mortgage, or be ready to speculate and go for the Interest Only Mortgage. You would not be fixed into the mortgage plan as it is when you sign up; both are flexible in their own ways, the IOM just has added stretch. If you are put off by the risk of an IOM, it is possible to switch over to a Repayment Mortgage after a specified period of time. IOM's are more appealing as they are of more of help getting first time buyers onto the property ladder, if this is your objective, then it is honestly worth considering, if it's a long term consideration, then make sure you have an investment plan in place to pay the capital or it could be a expensive mistake to regret.
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