Repayment or Interest only mortgage
One of the biggest questions you will face when purchasing your home is do I choose a repayment or interest only mortgage?
The main difference between the two and the choice you need to make is the affordability of the Interest only mortgage vs the capital payback on the Repayment mortgage.
Most people when they start the journey of house buying have the dream in mind of eventually owning the home outright, but not all, for some it is for investment purposes or purely a way of renting a house that you own and earning money off the back of the market rises on the property.
To own your own property outright the standard way of achieving this is to repay the “capital” each month in small chunks along with your mortgage interest. This is called a repayment mortgage.
If you have an alternative investment portfolio that could mean that you can pay off your loan in one hit, you could take an interest only mortgage and concentrate your additional income into your investments. With a view to paying off your mortgage when your alternate investment matures.
So What is an interest only mortgage?
The easiest way is to show you an example.
If you borrowed £200,000 over 30 years at a rate of 3.5% on an interest only basis.
- You will only pay back the interest on the loan.
- 3.5% * £200,000 = £7,000
- £7000 / 12 = £583.33Total interest over the term = £7,000 x 30 = £210,000
Total ownership of the property = Market rise of the property.
This method does not guarantee that you will pay off your mortgage, if whatever alternative you have in mind to pay it of does not come to fruition you will end up with a £200,000 debt on your house after the 30 year term.
Your options at the end of the 30 year term are to Remortgage Repay the £200,000 this can be from an alternate funding source or by selling your house.
For some people this is the better option as they plan to downsize and rely on the property having increased in value sufficiently to be able to but the downsized retirement property following the sale of the property.
Another thing to consider if you are contemplating an interest only mortgage is that you would continue to pay interest on the full value of the loan, for the duration of the term.
An Interest only mortgage is a cheaper alternative to a repayment Mortgage.
This is true to a point, the monthly repayments will be cheaper but in the long run unless you have a sound, guaranteed alternate investment strategy that will pay off your mortgage and more, you will be payig more in interest towards the latter part of the loan than you would be if in a repayment.
A repayment mortgage can seem Like you are running a marathon up hill however long it takes you are still slowly moving towards the finish line, however with an interest only mortgage you are walking around in a circle waiting for a taxi to arrive.
If your taxi turns up early and your alternate investment matures quicker than expected, you may beat the marathon runner to the finish line, however you may find that the taxi is running late or does not have enough fuel to get you to the end of the race.
So what is a Repayment Mortgage
Using the Interest only mortgage figures this is how a Repayment mortgage compares
£200,000 at an interest rate of 3.5% over 30 years
- Monthly Payment = £898
- Total paid over term = £324,307
- Total interest paid = £324,000 – £200,000 = £124,000
Total ownership of the property = Market rise of the property + initial loan £200,000.
At the end of the 30 year term not only do you own the house outright but you have paid £86,000 less interest.
At first when you get your annual mortgage statement it really looks like you have paid nothing off the loan, but as the term progresses you will pay less interest and more off of the capital. You can also decrease the term as you go along by making over payments, this can have a significant gain as you pay off the loan quicker.
So Repayment or Interest only mortgage?
The question unfortunately remains unanswered mainly because mortgages are not a one size fits all answer. At At Amber Mortgage Solutions we have a team of staff highly trained to guide you through this question and many more, call us today on 01702 619 221 and we will assist you in making the right decision for you.