Ways of repaying
There are two styles of mortgage repayment: ‘Repayment’ and ‘Interest Only’
With a repayment mortgage, your monthly payments to the lender go towards reducing the amount you owe as well as repaying the interest they charge. This means that each month you’re paying off a small part of your mortgage.
The advantages: It’s a clear approach – you can see your mortgage getting smaller and, provided you maintain the required payments, you also have the certainty that your mortgage will be repaid at the end of the term.
The disadvantages: Initially, the majority of your payments go towards interest on your mortgage, which means in the early years the amount you owe won’t reduce by very much.
Interest Only Mortgages
These mortgages are now only offered with very strict criteria and are not available to everyone. With an interest only mortgage you only pay the interest charged on your loan, so you’re not actually reducing the loan itself. You’ll will need to have a realistic and feasible arrangement in place to repay your loan at the end of the term; for example, investments or savings plans. Most lenders will want to see proof of these.
The advantages: If the savings or investment plan you choose performs well, then you could pay off your mortgage earlier compared to a repayment mortgage. At the full mortgage term there may be a lump sum available after the mortgage has been repaid.
The disadvantages: Very few investments or savings plans are guaranteed to repay your mortgage in full. If your savings or investment plan doesn’t cover the full amount, you’ll be responsible for paying the difference. Your mortgage lender can demand repayment and they’ll charge you interest on any outstanding balance until it’s repaid.
You should discuss the risks with your adviser and ensure you are comfortable with them.
It may be suitable for you to pay your mortgage by a combination of repayment and interest only.