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 building equity in the house and are more unlikely to see the property go into negative equity under the Repayment Mortgage, with equity in your house it will be easier to move house in the future if that is what you desire. While the payments are not as flexible as an IOM, you have the capacity to modify the fixed term length of the mortgage at a future date to even 30 or 35 years to keep the monthly payments down to a controllable level. It should also be pointed out that some, not all; Repayment Mortgages will allow you to make lump sum payments if you come into some money at a future date. The negatives; any amendments 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 process the changes, what the cost is will depend on the mortgage lender but it should not be too stern.


Interest Only Mortgages- Advantages and Disadvantages: With IOMs, the benefits and drawbacks are linked; many of the problems involved are two sides of the same coin. For instance, IOM's are more susceptible to market forces than Repayment Mortgages are, but depending on what the market is doing it can be a boon or a bother. Let's use an interest charge as a example, a 100k 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 embraced as the downsides are not, if interest rates go down by 1%, the payments diminish by the same quantity as stated above. Not only can the payments fluctuate over a larger 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 2k a year on mortgage repayments. What is not promoted about an IOM is that in actuality you should be saving into a subsequent investment vehicle, generating enough cash so at the end 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 2nd payment, too many people go down this road head first, gambling on the hope that by the time it comes to pay the lump sum off, house prices would have escalated enough to pay off the mortgage and have enough left over to scale down into a smaller house. It's easy to forget the fact that all other property prices will have increased also, jeopardising any profit you'd produced not being enough to even down scale. The only time gambling on house price inflation is expected to be successful 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 pay back the capital, another factor is that if interest rates are as low as they are currently, those on IOMs don't generally realise they should be making supplementary 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 money over the 25 years than a Repayment Mortgage; those on a Repayment Mortgages are paying capital which shrinks interest over time, IOM capital is unchanging as the capital is not being repaid. Which leads to the final drawback of an IOM, the property will not gain any equity during the lifetime of the mortgage.


As you can see there is more to chew over regarding IOM's as the unpredictable 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 play it safe with a Repayment Mortgage, or be willing 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 accommodating in their own ways, the IOM just has added flexibility. If you are put off by the risk of an IOM, it is possible to swap to a Repayment Mortgage after a certain period of time. IOM's are more alluring 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 dear mistake to regret.