Choosing the right mortgage can be a daunting experience for first-time homebuyers because the decision of getting a mortgage is going to affect their lives for at least 20-25 years, so everything must be precise as per the plan and requirements of the homebuyers or else, they will only regret their decision. For most people, it boils down to two types of mortgages, Interest Only Mortgage or Repayment Mortgage.
What is a repayment mortgage?
If you opt for this type of mortgage, then you will pay a combination of both, the interest as well as the capital each month. The monthly payments you will make in the first few years will be mostly the interest. As the mortgage nears its completion, the interest will reduce and only the capital remains. With the end of the fixed term, you will become the owner of your house since you have paid both the interest and the capital.
What is ‘Interest Only Mortgage’?
As the name suggests, this type of mortgage will allow you to pay only the interest every month. The capital payment will remain as it is. With this mortgage, your monthly payments will be less than what you would have paid in repayment mortgage, though the notion is that you should make a second monthly payment into an investment scheme to pay the capital off in a lump sum at the end of the fixed term.
Pros Of Repayment Mortgages:
- With this type of mortgage, you infuse equity in the house and see your property go into negative equity, hence allowing you to use the equity in case you decide to move house.
- You can easily modify the fixed term length of the mortgage to 30 or 35 years to bring down the monthly payments to a manageable level.
- You can make lump-sum payments whenever you receive money from somewhere in the future.
Cons of Repayment Mortgage:
- Any changes made to the mortgage agreement in the form of making multiple lump-sum payments or extending the fixed term could lead to the lender charging an additional fee.
Pros of Interest Only Mortgages
- Interest Only Mortgages are more vulnerable to market changes than repayment mortgages, so it can be a boon or bane depending upon how and when you opt for this type of mortgage.
- The payments can vary a lot compared to repayment mortgages, but monthly repayments are more flexible than a repayment mortgage because you will only pay the interest on the mortgage.
- With Interest Only Mortgage, you can save a lot for your secondary investment scheme, hence generating sufficient cash to pay a lump sum amount at the end of the mortgage term.
Cons of Interest Only Mortgages:
- With an IOM, you will end up paying more cash over the 25 years than other types of mortgage in the discussion. Since the capital is not changed at all, the property won’t gain any equity during the time of the mortgage.
If you are not sure whether you should opt for a repayment mortgage or interest-only mortgage, then you can consult an experienced mortgage broker like PIF Lending for precise assistance.