Mortgages – Interest Only or Repayment?

Getting a mortgage is probably the most important financial product you will ever get – it’s certainly likely to be the most valuable – so it’s important that you get the right one for your circumstances. In the post-economic crash world, some people are finding it harder to find the right deal, even though there remain many good deals around.

One of the first things you should consider is what type of mortgage you want, and there are two types: interest only and repayment. If you use a mortgage calculator from Santander, for instance, you’ll probably find that interest only mortgages look cheaper, but there are some extra things to consider.

Interest only mortgages are ones where you pay a fixed rate of interest but at the end of the term you still have to pay of the total underlying loan. So, if you got a mortgage for £100,000 for 25 years at an interest rate of 4%, at the end of your 25 years, you’d have paid £100,000 in interest, but still not have any additional equity on your house (unless the value of the house had gone up).

Repayment mortgages on the other hand involve paying off a certain amount of the value of your house along with the interest. These are usually slightly front-loaded, so to begin with you pay more interest and the overall value of your loan doesn’t fall that much, but as the years go by you eat more and more into the loan value because it’s smaller and thus generates much less interest.

So, conventional wisdom would suggest going for the repayment mortgage, after all, when the mortgage is paid off you actually own your house. However, in certain circumstances you may choose to go for the interest only route.

Interest only mortgages are generally cheaper than repayment mortgages (because you’re paying less off), and can be a good way for people who have tight cash flows to get onto the property market. Also, if you’re intending to move on in the near future, an interest only mortgage might be right up your street.

The second circumstance is if you’re considering a little bit of home improvement, or looking to move up the property ladder by developing properties. This way you can be sure of the size of your mortgage repayments, and you’re looking to generate extra equity in the house by increasing its value, as you’re only likely to own the house for a short period, paying off the mortgage isn’t really in your best interests. 

In general though, a repayment mortgage is the best route to go down, if you can afford it. If, however, you’re a first time buyer looking to get onto the market, interest only might just be the right way for you to go