Different Types of Mortgages

There are 2 main types of mortgage, repayment and interest only.

A repayment mortgage is where each monthly payment you make is made up of 2 elements. You will be paying interest on the outstanding mortgage balance, but will also be making a element of capital repayment. This basically means that your mortgage balance will be reducing with each payment you make. The another advantage of this type of mortgage is that assuming all monthly payments are made, your outstanding the loan will be repaid at the end of the term. A repayment mortgage is also sometimes known as a capital and interest mortgage.

With an interest only mortgage, your monthly mortgage payments to the lender will be made up of purely interest on your mortgage’s outstanding balance. Although this will mean much lower monthly payments to your lender, the disadvantage is that mortgage balance will not reduce. Assuming you make all your monthly mortgage payments, your outstanding balance at the end of the mortgage term will be the same as the balance at the beginning of the mortgage. It is then the borrower’s responsibility to ensure that they have sufficient money available at the end of the term to clear the mortgage. Please see the section relating to repaying your interest only mortgage to see the options available.

Repaying Your Interest Only
Mortgage Lump Sum or Regular Overpayments
Offset Mortgages
Investment Vehicles

It is important to note that the only route which guarantees to repay the mortgage at the end of the term is a repayment mortgage. This is the recommended route for the majority of borrowers buying their home with the help of a mortgage. If using the interest only route, it is important to be sure this is because there is a good reason, and not just because the mortgage payments will be lower. If you can’t afford a repayment mortgage, you probably can’t afford the mortgage.

The above advice was produced by Mr Manish Patel (BA hons), if you require any further information or have any questions regarding financial advice, please feel free to contact him. Email financial advisor

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