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Capital Repayment vs Interest Only Mortgages

We are often asked about the different types of mortgages and which best suits people’s finances.

The two main options are Capital Repayment mortgages and Interest Only mortgages.

At one point in time, interest only mortgages were extremely popular, however, today they are less so. Since then, mortgage regulations have tightened and regardless of whether you choose an interest only mortgage or a capital repayment mortgage, you are not likely to be offered a mortgage that you can’t afford to repay.

What is a capital repayment mortgage?

 A capital repayment (or repayment) mortgage is where you make monthly payments which go towards clearing some of the mortgage debt, as well as the interest owed on it.

The amount you pay each month is calculated so that by the end of the mortgage term, you should have paid off the full amount owed on the property. This typically takes around 25 years but can vary depending on your circumstances and at the end of this period you will own your property outright.

What is an interest only mortgage?

 This is where your monthly repayments only go towards the interest owed on your mortgage and not on repaying the total amount you owe on the property.

Typically, this means that the monthly payments will be lower, however, at the end of the mortgage term, you still owe the same amount of money as when you took out the mortgage. You will then need to repay the full balance at the end of the mortgage term.

In today’s market, interest only mortgages are usually only available on buy-to-let properties. If you do want to choose this option, you will need to have made other arrangements to pay back the capital owed.

Common ways to do this are by using a repayment vehicle such as an ISA, investment fund or pension or by using a lump sum for example if you received any inheritance or a pension withdrawal.

You could also choose to sell the property and use this money to pay back what you owe to the lender.

It’s important to note that taking out an interest only mortgage can be considered risky, as there is no guarantee that the money you’ve invested elsewhere will be enough to pay off the full mortgage when the term ends.

You will also pay more in total for an interest only mortgage as you are paying interest on the entire loan each month, whereas with a repayment mortgage the amount of interest you pay reduces as you clear more of the loan.

Which option is best for me?

As always, this depends on your individual circumstances and the purpose of the mortgage. It may be helpful to speak to an independent mortgage adviser who can assess your situation and understand if the property is intended to be residential or buy-to-let and therefore advice on the most suitable option.

If you’d like to find out more about the different types of mortgages, or discuss what options are most suitable for your circumstances, get in touch here or chat to us via our live chat function!

 Your home may be repossessed if you do not meet your monthly repayments.

 

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