(The two basic types of mortgage are: repayment (also called capital and interest) and interest-only.
With this type of mortgage, the monthly payments include a proportion of the original sum borrowed (known as the capital) as well as the interest – hence the alternative name of capital and interest.
The Pros: Provided you keep up the payments, you are guaranteed to have cleared your debt by the end of the mortgage term and the property will be all yours.
The Cons: The monthly payments are higher than for an interest-only loan.
With this kind of loan, your monthly payments cover just the interest charged on the money you have borrowed. You are not paying off the capital.
The Pros: Because you are repaying only interest, the monthly costs are lower than for a repayment loan.
The Cons: At the end of the agreed mortgage term, you still owe the original amount, and if you can’t repay it, the mortgage lender can take possession of your property.
Also, because you are borrowing the whole capital sum for the entire term, rather than gradually paying it off, you will pay considerably more interest than with a repayment loan.
So what should you do?
If you can afford it, it is safer and cheaper in the long-run to go for the repayment option.
If you really need to keep your costs down for a few years, consider an interest-only loan.
But, if you don’t have a reliable alternative source of funds to clear the debt, switch to repayment as soon as you can, or you will be storing up trouble for the future.
To find out how to make the switch, read How to change from an interest-only to a repayment mortgage.
Read More about Interest Only Mortgages
- 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
- Best Buy Tables for Interest Only Mortgages UK
- Frequently asked / common questions about interest-only mortgages