Understanding Repayment and Interest Only Mortgages.

Mortgage Types.

There have probably never been more household mortgage options available than there are in the present time. And while Banks, Building Societies and Mortgage Lenders vie with each other to offer more and more attractive packages to would-be purchasers, essentially there are two main types of mortgage, though combinations of the two are many and varied.

Repayment Mortgages.

This is possibly the most generally recognised type of mortgage. The methodology is simple: repayments are made on a monthly basis and are inclusive of both the capital and interest elements. This type of mortgage is taken out for a specified period, which can be for any duration between five to thirty-five years, though more usually for around twenty-five years. There will also be a stipulation that life insurance is taken out to guarantee the full repayment of the mortgage in the event of the borrower’s death. Should payments continue to be made according to the terms of the contract, the mortgage will be fully redeemed at the end of the specified period and the ownership of the property will be assured. However, borrowers should be aware that during the early years, the repayments will be structured mainly towards repayment of the interest element of the loan and the capital will reduce only by a small proportion. The appeal of this type of mortgage is that it is totally transparent and should the borrower be content to allow it to run its full contractual course, then redemption will be automatic at the end of the fixed term of the life of the mortgage. Alternatively, should the borrower decide to sell the property within the earlier years of the contractual term, it is likely that very little of the capital element will have reduced. There may also be a charge made for early redemption of the mortgage.

Interest Only Mortgages.

With this type of mortgage all repayments are taken up in paying only the interest element of the loan. This means that should the mortgage extend to the full term of the contract, then no part of the capital amount will be reduced and ownership of the property cannot therefore be completed by the borrower. This may be useful if the objective of the borrower is to limit repayment to an absolute minimum for an initial short period of time, allowing financial consolidation until more favourable circumstances provide the opportunity to change the mortgage option. For the speculator this type of mortgage may also be seen as a means of entering the property market at a time when property is rapidly appreciating in value, thus allowing them to offset the increased appreciation in equity against the outstanding capital of the loan. The borrower may then decide to sell and redeem the loan in full, possibly even with profit. However, if the intent is to own the property outright, the borrower must institute an alternative plan for repayment of the capital element. Such plans can include setting up a savings option, or instituting an ISA, TESSA, pension, endowment or mortgage plan.