There are many different types of mortgages available these days, but all come under one of two umbrellas, and these are repayment or interest only mortgages. A repayment mortgage is also known as a capital and interest mortgage, and is the most commonly taken mortgage type. With this type of mortgage your monthly repayment is allocated towards both your principle loan balance and the interest on your loan.
Because of the way that repayment mortgages work you will actually see your mortgage balance coming down over time, and the repayments will continue until you have paid off your mortgage in full. This is a benefit for many property purchasers, who want the peace of mind that they repayments cover both the mortgage loan and the interest.
One the downside, repayment mortgages do cost more in terms of monthly repayments, so your repayments with this type of mortgage would be higher than if you had an interest only mortgage. You will find repayments mortgages available from both mainstream high street lenders as well as online lenders. With a repayment mortgage you can choose from a range of mortgage types, such as a fixed rate repayment mortgage or a standard rate repayment mortgage depending on your needs and circumstances.
With an interest only mortgage there is a higher element of risk involved, as the money that you repay each month is only paid onto the amount of interest that you owe, and does not touch your principal loan balance. This means that you will never see your actual loan amount go down over the term of the mortgage, because none of your repayments are applied to this balance.
This means that at the end of your mortgage period you will still owe your actual principal loan balance, and you need to therefore arrange some sort of investment such as an ISA or endowment to try and raise the money to repay the loan balance. However, the risk is that your investment may not raise the required amount of money to repay the balance of your loan. On the upside the repayments on an interest only mortgage are lower than with a repayment mortgage, and therefore can make things easier for those whose finances are tight.
Your circumstances and budget will determine whether you go for a repayment or an interest only mortgage, but most people prefer the security of an interest only mortgage, where the mortgage balance is clear by the end of the term. In fact, it is also worth bearing in mind that whilst interest only mortgages did become popular in the 1980s and 1990s, many lenders now view them as high risk and will not offer these mortgages any longer.
It is important to consider all the pros and cons of both repayment and interest only mortgages before you make any decision, and if you are not comfortable about making a decision you may want to seek advice from a financial adviser.
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