First Home Buying
First Time Buyer Guide
Repayment and Interest-Only Mortgages
What Is a Repayment Mortgage?
It’s a type of mortgage that allows you to repay the money borrowed (capital) together with the interest added by the bank or building society for lending you the cash to buy a property. Your regular monthly repayments will cover some of the capital and some of the interest. By the end of the mortgage term, if you’ve managed to keep up on the payments, you’ll owe nothing and the property will be yours.
At the beginning you’ll be paying more interest than capital, but over time, as the capital balance goes down, things change and when you’re getting to the end of the mortgage your payments will be covering more capital than interest.
This type of mortgage is suitable for those buyers that want to make sure their loan is paid off at the end of the mortgage period.
What Is an Interest-Only Mortgage?
Unlike repayment mortgages, interest-only loans will have you paying only the interest monthly and repaying the capital borrowed at the end of the mortgage term. This means that either you’ve managed to save the money by other means (investments, inheritance, etc) or you might have to end up selling your property to pay off the loan.
What makes this type of loan attractive is that the monthly payments you’ll have to cover will be much lower than the ones for a repayment mortgage. But it’s no walk in the park either: at the end of the mortgage term you’ll have to pay off the initial amount of the loan. All of it. If you find yourself in the uncomfortable situation of not having enough cash to pay the capital in full, your precious property could end up being repossessed by your mortgage lender.
Clearly, before taking the plunge into this type of loan, you should take into account the need to save along the way: make sure your investments or an inheritance coming your way will cover the debt.
Before picking one or the other, you’ll have to figure out what you can afford. Read our Affordability article to find out what it is and how it’s calculated.