Property > Mortgages
Mortgage Repayment Options
There are two main mortgage repayment options to be aware of: repayment mortgages and interest-only mortgages.
Repayment Mortgage
A repayment mortgage means that you will pay off the interest charged by the lender and a bit of your mortgage capital each month (the amount you actually borrowed). The repayments are calculated so that you are debt-free by the end of your mortgage term.
For the first section of the mortgage term, your repayments will largely go towards paying off interest instead of mortgage capital. This changes over time due to the interest owed decreasing in line with the reduction in the size of the loan.
A repayment mortgage is the most popular form of mortgage repayment.
Advantages:
- You own the home at the end of the mortgage term
- You pay less interest overall as each payment you make reduces the size of your outstanding debt
- Less likely to suffer from negative equity (when your property value has fallen to a figure that is less than the outstanding balance on your mortgage)
Disadvantages:
- You have larger monthly repayments, leaving you less spare cash as a result
Interest-Only Mortgage
With an interest-only mortgage, you only pay off the interest, none of your mortgage capital. Although this is cheaper on a monthly basis, it doesn’t contribute towards paying off any debt and therefore, you will be required to pay back the full amount at the end of the mortgage term.
It is worth noting that this type of mortgage repayment is currently very rare and is mainly used for buy-to-let properties.
Advantages:
- Lower monthly repayments
- You will have more spare cash
Disadvantages:
- More expensive overall as the amount owed doesn’t decrease
- You still owe the full amount at the end of the mortgage term
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