When it comes to buying a property, choosing the right mortgage repayment method is an important decision. It can affect your financial planning for years to come. In this blog, we will explore the different repayment methods available in the UK, and help you understand the pros and cons of each.
1. Repayment Mortgage
A repayment mortgage, also known as a capital and interest mortgage, is the most popular repayment method in the UK. With this type of mortgage, you repay a part of the loan plus interest every month. As you continue to pay, the amount of interest owed decreases, and more of your payment goes towards repaying the loan. This means that by the end of the mortgage term, you will have fully repaid the loan and own your property outright.
Clear repayment plan: With each monthly payment, you are steadily reducing the amount you owe on your mortgage.
Guaranteed to pay off your mortgage: At the end of the mortgage term, you will own your property outright.
Potentially cheaper in the long run: As you pay off more of the loan, the amount of interest you owe decreases, which can lead to a lower overall cost.
Higher monthly payments: Monthly payments on a repayment mortgage are typically higher than other types of mortgages.
Limited flexibility: Once you've agreed on a repayment plan, you can't change it without refinancing.
2. Interest-Only Mortgage
With an interest-only mortgage, you only pay the interest on the loan each month. This means that you are not reducing the amount of the loan itself, and will need to pay the full amount at the end of the mortgage term.
Lower monthly payments: Monthly payments on an interest-only mortgage are typically lower than on a repayment mortgage.
More flexibility: You can invest in other areas and potentially make more money than you would by overpaying your mortgage.
High risk: If you're unable to repay the loan at the end of the mortgage term, you could lose your home.
More expensive in the long run: As you're not reducing the amount of the loan, the amount of interest you owe remains the same. This means that an interest-only mortgage will typically cost more in the long run.
3. Combination Mortgages
A combination mortgage is a hybrid of the repayment and interest-only mortgages. With this type of mortgage, you pay part of the loan plus interest every month, as with a repayment mortgage. You also have the option to pay interest only on a portion of the loan. This can help to reduce monthly payments, while still allowing you to pay off a portion of the loan.
More flexibility: You can choose to pay off as much of the loan as you can afford, while still keeping your monthly payments manageable.
Reduced monthly payments: Paying interest-only on a portion of the loan can help to keep your monthly payments low.
Complicated: Combination mortgages can be more complex than other types of mortgages.
Higher risk: If you're unable to repay the interest-only portion of the loan at the end of the mortgage term, you could lose your home.
Choosing the right repayment method for your mortgage is an important decision. We hope this blog has helped you understand your options better. Remember, always seek professional advice before making a decision.