What are the differences between interest only and repayment mortgages?
Posted on 25th October 2019
It is not unusual for your local property solicitors to be asked questions about their client’s mortgage, and what it means for them. Sadly, mortgage advice generally needs to come from a financial advisor, and you should always seek to speak to them about any queries you have in the first instance. However, if you’re just looking to find out the difference between a repayment mortgage and an interest only mortgage, then look no further: our solicitors in Preston have got you covered.
There are generally two types of mortgages available:-
An interest-only mortgage is when you take out a loan against an asset, such as a property, and you only repay the interest every month, meaning that at the end of the loan term, you will need to pay off the remainder of the loan, or sell the asset.
In terms of a repayment mortgage, this means that you pay part of the outstanding balance of the loan off monthly, as well as any interest and other charges. Generally, at the end of the term, you will own your property outright.
This isn’t to say that there aren’t other options available to you, but these are two common choices. If you’re in need of financial advice about the best type of loan to take out, we cannot stress this enough; SPEAK TO A FINANCIAL ADVISOR. Your Solicitors in Preston can provide advice on a range of legal matters, but we are not authorised to provide financial advice!
So, what are the advantages and disadvantages of an interest-only mortgage?
Well, generally, the repayments that you will be making are lower. However, at the end of the loan term, you will likely not own your property (a bit like renting a property). However, unlike renting, if the property has increased in value since it was purchased, and you haven’t borrowed any additional funds against the same, you may walk away with more profit than what you put in.
Another plus, for some people, is that as the repayments are lower, you can generally put more money aside to make sure you have enough for things such as home improvements and life’s little spends.
On the down side, as the amount that you owe will not decrease, this can be more expensive. Likewise, the amount of interest you pay is unlikely to decease either, meaning you’ll always be paying the same amount, for the whole mortgage term. Another major downfall, is that if the asset deceases in value, you could find yourself in negative equity – so you’ll owe more money than what your asset is worth!
So, what are the advantages and disadvantages of a repayment mortgage?
As explained previously, repayment mortgages can be good as you will usually own the property at the end of the payment term. So, why could this be the better option over an interest-only mortgage?
Well, you normally end up spending less money overall, as the balance is constantly reducing. The more you pay, the more of your balance you will clear, especially towards the end of your term. Another big bonus, is that you will own the property at the end of the term (again, providing that you have not taken out any additional borrowing). And, as you’re borrowing money which you are repaying, the interest rates are normally lower.
However, like with interest-only mortgages, there are some disadvantages to this type of loan, too. Firstly, if you decide to move property, you will need to take out a new mortgage which, to help make the move affordable, may also have to be over a longer term (so you can start on a 25 year mortgage term, and then move house and be back on another 25 year mortgage term). Secondly, in the earlier years of your mortgage term, little capital is repaid, so if you sell, you may not have loads of equity.
How can my local property solicitors help?
Well, if you’ve not already heard, we’re not financial advisors – we’d suggested seeing somebody local to you for financial advice. However, we can help deal with the legal side of your new purchase (or property sale). Our team offer excellent fixed-fees, that are guaranteed to contain no hidden fees. We’re available 5 days a week, 8am to 6pm (and sometimes way later than this, too!), and you can contact our team, here.
MG Legal – Your Local Solicitors
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