Mortgages

Types of Mortgages Available to You

There are two different types of mortgages available to UK residents and these are repayment mortgages and interest only mortgages. Below we explain both options with their advantages and disadvantages.

Repayment Mortgage

This is the most common type of mortgage that a homeowner in the UK would have. Each monthly repayment to the lender includes both the interest element of the loan and also a small part of the actual capital of the borrowing.

Advantages of a Repayment Mortgage

The main advantage with a repayment mortgage is that you know that at the end of the term of your mortgage, (often 25 years) the property that you have mortgaged will be yours with the mortgage debt fully repaid. Also if during the course of your mortgage you make overpayments then this will reduce both your capital and interest amounts.

Disadvantages of a Repayment Mortgage

A repayment mortgage will carry larger monthly repayments than an interest only loan because you are in aaddition to repaying the interest making a payment each month towards the capital, in the early years when finances are tight this can put an added strain to your finances. Also in the early years the actual amount of capital being repaid is very small and if you are intent to move fairly regularly you will find that very little capital has actually beebn paid off. One other disadvantage is that many repayment mortgages impose a financial penaly to the borrower if making overpayments in way of lump sums.

Interest Only Mortgage

An interest only mortgage is where your monthly repayment only pays the interest element of your home loan. The repayment of the capital of the loan must be made by you at the end of the term of your mortgage. This is normally done with the proceeds of an investment vehicle of sorts, previously many people took out endowment policies for this purpose but latterly savings plans, ISA's and pensions would be targeted to repay your mortgage at the end of the term. This is not guaranteed as it depends on the returns achieved by your chosen investment. Please note we do not advise on investments and you should seek expert advise.

Advantages of an Interest Only Mortgage

The repayments made each month are much lower than those of a repayment mortgage so this can help cash flow and these types of mortgages are favoured by property investors in the Buy to Let market.

Disadvantages of an Interest Only Mortgage

One main factor of late has been if the investment vehicle used to repay the capital at the end of the mortgage term fails to achieve the amount required. This has been the case with many endowment policies recently. It means that any shortfall must still be met by you. So you must regularly check your investment to ensure that it is performing to your expected targets and if not then you must increase payments into the fund to cover any anticipated shortfall.

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