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 making the right choice to get the fitting mortgage rate to suit your state of affairs is a choice to be made astutely, that choice for the majority will come down to a Repayment Mortgage or an Interest Only Mortgage.

What is a Repayment Mortgage? A Repayment Mortgage consists of monthly payments which will pay a portion of both the capital and interest acquired so far. Throughout the first few years, the bulk of your monthly payments will be going on the interest with a meagre amount of the payments covering the capital. However as time progresses, a higher majority of the capital will be paid off, and the more capital paid off, the less the interest becomes with each passing year. When the end of the fixed term is reached, both the interest and capital will have been paid off in full and you fully own your 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. Under this type of mortgage your monthly payments will be less than on a Repayment Mortgage, though the notion 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, if you decide to move it should be easier to gain a new mortgage on the next property with that equity in your house. While the payments are not as accommodating as an IOM, you have the capacity to alter 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 manageable level. It should also be pointed out that several, not all; Repayment Mortgages will allow you to make lump sum payments if you come into some money at a future date. The drawbacks; any adjustments in the mortgage agreement, i.e. extending the fixed term or even making an additional lump sum payment, could result in the mortgage lender making a fee to handle the changes, what the cost is will depend on the mortgage lender but it should not be too harsh.

Interest Only Mortgages- The Benefits and Drawbacks:

With IOMs, the positives and negatives are linked; many of the issues involved are two sides of the same coin. For example, IOM's are more sensitive to market forces than Repayment Mortgages are, but depending on what the market is doing it can be a godsend or a nuisance. An interest rate rise would be the best example, a 100,000 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 assistance are as wanted as the downsides are not, if interest rates go down by 1%, the payments fall by the same amount as stated above. Not only can the payments ebb and flow over a longer spectrum than Repayment Mortgages, but the monthly repayments are more flexible 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 2,000 a year on mortgage repayments. What is not publicised about an IOM is that in actuality you should be saving into a secondary investment vehicle, generating enough cash so at the finale 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, many people head down this way, gambling on the expectation that by the time it comes to pay the lump sum off, house prices would have risen enough to pay off the mortgage and have enough left over to scale down into a smaller house. It should not be forgotten that it's not just your property price that has risen; all other property prices will have shot up also, risking any profit you had generated not being enough to even downsize. The only time gambling on house price inflation is expected to work is if the property is a buy-to-let, as you would be profiting on and covering the rent, and could then sell the property to settle up the capital, another factor is that if interest rates are as low as they are at the time of writing, those on IOMs don't in general 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 essentially paying more cash over the 25 years than a Repayment Mortgage; those on a Repayment Mortgages are paying capital which shrinks interest over time, IOM capital is inert as the capital is not being repaid. Which leads to the final negative of an IOM, the property will not gain any equity during the time of the mortgage.

As you can see there is more to deliberate regarding IOM's as the erratic 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 be more prudent with a Repayment Mortgage, or be ready 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 flexible in their own ways, the IOM just has added stretch. If you are put off by the risk of an IOM, it is possible to switch over to a Repayment Mortgage after a specified period of time. IOM's are more appealing 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 expensive mistake to regret.

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