With numerous mortgage options available in the UK, finding one that works best for your personal circumstances can be difficult. Plus, mortgages are a significant investment that can impact your finances over the long-term, so choosing a mortgage solution should not be made quickly. Two primary options include interest-only mortgages and repayment mortgages – both of which could work for you depending on your financial goals.
What Is An Interest-Only Mortgage?
An interest-only mortgage requires the borrower to pay off the accumulated interest every month rather than the capital borrowed. This means that repayments are often less throughout the repayment period, but you will still be left with the original loan amount to repay at the end of the mortgage term. Therefore, interest-only mortgages will generally be used by those who are looking for lower monthly payments or who plan to use other investments to pay off the loan at the end of the term. It’s important to note that most UK mortgage lenders will ask how you intend to repay the loan, so it is recommended to have a plan in place.
What Is A Repayment Mortgage?
A repayment mortgage, also referred to as a capital and interest mortgage, requires borrowers to repay both the capital and the interest of the loan in monthly instalments over an agreed-upon period of time until everything has been repaid. By opting for a repayment mortgage, you will have larger monthly instalments compared to an interest-only mortgage, but as long as you keep up with repayments, your mortgage will be fully paid off at the end of the mortgage term and you will own your home outright.
Key Differences Between Interest-Only And Repayment Mortgages UK
When choosing which residential mortgage option to go with, it is best to compare the key differences of each financial product. Interest-only mortgages and repayment mortgages have a number of distinctive differences including monthly payments, risk, interest and more.
The most significant difference between the two mortgage options is the monthly payment structure. Repayment mortgages rely on higher monthly payments to cover the whole mortgage by the end of the term, compared to interest-only mortgages which have lower monthly payments focusing solely on interest.
Total Paid Interest
When looking into the long-term, interest-only mortgages in the UK tend to result in higher total interest payments as the original balance does not reduce. This is different to repayment mortgages whereby the mortgage total decrease each month, also resulting in lower interest rates.
Level Of Risk
It is important to consider the level of risk involved in your mortgage to ensure you feel comfortable with your decision. Interest-only mortgages tend to carry a higher level of risk due to the mortgage amount needed to be paid in a lump sum at the end of the term. As a result, a reliable strategy should be in place which might involve selling the property, using investments, or selling valuable assets. On the other hand, repayment mortgages offer a clearer path towards full ownership, reducing risk.
Can I Change An Interest-Only Mortgage To A Repayment Mortgage?
Yes, it is generally possible to change from an interest-only mortgage to a repayment mortgage if you believe it could be a better solution. However, it is worth noting that switching mortgages may come with certain conditions and requirements depending on your lender.
Factors such as your financial situation, credit history, and remaining mortgage term will all play a part in determining whether you are able to change mortgages. If your lender agrees, the change will involve adjusting your monthly payments to cover both the mortgage amount as well as the interest, so it is important to consider whether you will be able to afford the higher monthly payments before making your decision.
When Is It Better To Have Interest-Only Over Repayment Mortgages?
Repayment mortgages are typically more popular than interest-only ones, yet there are situations where a borrower may prefer to only repay the interest of the mortgage. For example, if you have an investment plan that could yield the necessary funds to repay the loan at the end of the term, an interest-only mortgage could work well.
In a similar way, if you are facing financial difficulties but predict that your situation may improve, then an interest-only mortgage could be the more manageable option before your circumstances change.
Whatever your situation, choosing the right UK mortgage for your personal circumstances is key. It could be advisable to speak to a mortgage broker or expert about your situation if you are unsure on which route to go down.