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People
tend to choose interest-only mortgages because they think
they're cheaper than repayment
(capital and interest) mortgages.
And in the short term, this is true.
You are repaying only the interest
on the original sum borrowed known as the capital so
the monthly payment is considerably lower than for a comparable
repayment loan.
However, this is only part of the story.
Over the full mortgage term, you will end up paying significantly
more interest than you would with a repayment mortgage,
because you are not whittling away the capital
you owe.
With a repayment
mortgage, you pay this off as you go, so provided
you keep up-to-date with the monthly payments, you will
be debt free by the end of the mortgage
term.
With an interest-only
mortgage loan, you have to find a way of repaying this
capital debt at the end of your term.
Unless you're expecting a substantial legacy or other windfall,
this will involve setting up and making regular monthly
payments into a suitable repayment vehicle.
For more on this, see Interest-only
mortgages and our Quick
guide to interest-only mortgages.
You would pay £750 interest a month giving
a total bill of £225,000.
Meanwhile, you would
need to be saving to repay the original £150,000.
Assuming you could find a safe, tax-free investment paying
6 per cent annual interest over 25 years and that's by
no means certain you would have to put away £221
a month or £66,300 over the full term to amass
the necessary cash.
That gives a combined monthly outlay of £971.
That means you would be facing a total bill over the 25
years of £291,300 (£225,000 and £66,300) to clear your loan.
Now let's assume
you took the same £150,000 6 per cent mortgage on a repayment
basis.
In this case, you would pay £966.45 a month, made up of
capital and interest.
Provided you kept up with this repayment, by
the time the 25 years were over, you would be guaranteed
to be debt-free at a total cost of £289,935.
So going for the cheap interest-only option would actually
have cost you an additional £1,365.
And that's if your tax-free investment returned the necessary
6 per cent.
If it failed to achieve this, you would be left
with part of the capital debt still to pay, making the interest-only
choice even more expensive.
An alternative: The part
and part mortgage
If this has left you less keen on borrowing interest-only,
but you still need to keep costs down in the early years,
there is a possible solution.
It's called a part and part mortgage, and it combines features
of interest-only and repayment loans.
To find out more, read about The
part and part mortgage.
Should I choose repayment or interest-only?
How to change from an interest-only to a repayment mortgage.
The true cost of an interest-only mortgage
How to decide if you should get interest only
Are interest only the new endowment mortgages?
Best Buy Tables for Interest Only Mortgages UK
Frequently asked / common questions about interest-only mortgages
Read our complete guide to interest only mortgages
What went wrong with endowment mortgages?
What should I do with my endowment mortgage?
How to make up an endowment shortfall
Was I mis-sold my endowment mortgage?
How to complain about an endowment
Endowment mortgage claims: a legal loophole
Can I claim endowment compensation?
Am I too late for endowment compensation?
Help making a complaint about your endowment mortgage
Fixed
Rate
Capped
Rate
Discounted
Rate
Interest
only mortgages
Interest
repayment arrangements
Choosing
a Mortgage
Different Mortgage Types
Re
Mortgages
How to Find your Mortgage
Mortgages in Principle
Guide to Buying Home in the UK
Guide to UK Home and Mortgage Insurance
To read more on this subject please see the list below or your mortgage guide or your home buying guide
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Back to A to Z Mortgages UK List
Read more about Types of Mortgages
See contents of Full Mortgages Guide
See contents of Home Buyers Guide
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The
two major varieties:
Repayment
mortgages
Interest
only mortgages
Then
mix in the various:
Interest
repayment arrangements
Finally,
to cover all the different types there's a
Complete
A-Z of mortgages
All UK Mortgage types
100%
Mortgages
Base
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Loans
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Mortgages UK
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Only Mortgages
ISA
Mortgage
Key
Worker Mortgages
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in Principle
Part
and Part Mortgages
Pension
Mortgages
Prime
Mortgages
Repayment
mortgages
Shared
Ownership Mortgages
Standard
Variable rate
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