What is the difference between repayment and interest only mortgage?

When it comes to purchasing a property, there are several options available for financing the purchase. One of the most popular ways to finance a property purchase is through a mortgage. Mortgages are essentially loans that are taken out to finance the purchase of a property, and there are two main types of mortgages available in the UK – repayment mortgages and interest-only mortgages. We offer clients the best investment property based on their needs here at Aventine Property.

Repayment Mortgages

A repayment mortgage is the most common type of mortgage in the UK. With a repayment mortgage, borrowers make regular monthly payments that are designed to pay off both the interest on the loan and the capital amount borrowed. In other words, each payment that is made is not only paying the interest due on the loan, but is also reducing the total amount owed.

The main advantage of a repayment mortgage is that by the end of the mortgage term, assuming all payments have been made on time, the borrower will have paid off the entire mortgage and will own the property outright. This makes repayment mortgages a popular option for those who want the security of owning their own property.

Interest-Only Mortgages

With an interest-only mortgage, the borrower only pays the interest on the loan each month, and does not pay any of the capital amount borrowed. This means that the borrower’s monthly payments will be lower than they would be with a repayment mortgage.

The main advantage of an interest-only mortgage is that it allows borrowers to keep their monthly payments low, which can be useful for those who are struggling to afford higher monthly payments. However, at the end of the mortgage term, the borrower will still owe the full amount borrowed, as the capital amount has not been paid off during the mortgage term.

In order to pay off the capital amount owed at the end of the mortgage term, borrowers will typically need to have a plan in place, such as investments or other assets, which can be used to pay off the mortgage. Alternatively, they may need to refinance the mortgage, which could be difficult if their financial situation has changed since they first took out the mortgage.

The Risks of Interest-Only Mortgages

While interest-only mortgages can be useful for those who need to keep their monthly payments low, they do come with certain risks. One of the main risks is that if the borrower is unable to pay off the capital amount owed at the end of the mortgage term, they may be forced to sell the property in order to pay off the mortgage.

This can be particularly problematic if property prices have fallen, as the borrower may end up owing more on the mortgage than the property is worth. In this scenario, the borrower would be left with a shortfall, which they would need to make up in order to pay off the mortgage.

Another risk of interest-only mortgages is that they are typically only available to borrowers who can prove that they have a suitable repayment plan in place. This means that borrowers will need to demonstrate that they have investments or other assets that they can use to pay off the mortgage at the end of the term.

This can be difficult for some borrowers, particularly if they are relying on the value of their property to increase over time. If property prices do not increase as much as expected, the borrower may find themselves in a situation where they are unable to pay off the mortgage at the end of the term.

Which Mortgage is Right for You?

Choosing between a repayment mortgage and an interest-only mortgage will depend on a number of factors, including your financial situation, your long-term goals, and your attitude towards risk. Click here whether should you get an interest-only or repayment mortgage.

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