What Differences Are There Between Interest Only And Capital Repayment Mortgages?
Posted on 15th April 2020
MG Legal, your Conveyancing Solicitor Garstang, handles property purchases from a variety of clients, some wanting to buy or move to a new family home, others wanting to purchase a second or third property as an investment, also known as a “buy-to-let” property, where the owner is a Landlord, letting the property to Tenants.
Whilst our clients come to us for our Legal Services rather than Financial Advice, we do see two main types of Mortgage, the Interest Only and Capital Repayment Mortgage.
What is an Interest Only Mortgage?
At MG Legal, your Conveyancing Solicitor Garstang we have seen Interest Only Mortgages are generally more popular with Buy-to-Let buyers as they allow a lower monthly payment. This is because Interest Only Mortgages only require the payment of interest on the mortgage. At the end of the Mortgage you must either have another source of capital to fund the repayment of the equity (value of the loan itself), sell the property or re-mortgage it again.
Landlords often use this type of Mortgage as it allows them to invest the different between their Mortgage payment and their rental income separately. In most, but not all, cases property does increase in value over a longer period of time and so, generally, between rental income and property value increases, a profit can be made.
The risks are, of course, that in some scenarios, such as the 2008 financial crisis, property can significantly decrease in value, our property solicitors are approached by many a client who bought at the peak of the property market, who are now receiving estate agents valuations, at drastically lower than the property was some 12 years ago. What was once a very solid investment, as interest rates peak and trough, and the world enters recession, often caused by global disaster, property can be a risky gamble. There is also the fact that you must invest your money wisely to offset the gains made by having a Capital Repayment Mortgage and that if your profit is relatively small, by the time you have paid for Early Settlement Fees, Estate Agents Fees, Conveyancing Fees and any new purchase costs, this can eat into and swallow those profits.
You can, of course, use this method of Mortgaging to buy your main home, however, as it runs the risk of your being unable to repay the balance at the end, you could either lose your home or have to pay a significant sum more to own the same house compared to a single Capital Repayment Mortgage. Our solicitors in Garstang, Preston, are not here, however, to advise you of the mortgages on offer, the risk of buying a property (or the benefits) or the present interest rate, and by the time you are instructing our wonderful property team, you will have a mortgage in place, and a firm offer accepted on your property, whether buying, or selling.
What is a Capital Repayment Mortgage?
This is the Mortgage most homebuyers use, this is the usual method of going about buying and owning your home of choice. Each month you pay a sum of money, equivalent to an Interest Only Mortgage, but with an additional sum to repay some of the value of your property, known as Capital. So, over time, each monthly payment covers less interest and more of the Capital and after a time, usually 20-25 years, you will own your home.
There are far less risks involved in a Capital Repayment Mortgage and provided you make the payments each month for the agreed term, you own your home outright at the end of the Mortgage. You know, long in advance, how much your Mortgage will cost, although you can usually make additional savings by renewing your Mortgage rate at the end of any fixed Term.
More and more Capital Repayment Mortgages are “portable” and so if you move to a new home, you can bring the Mortgage with you, rather than having to repay and then apply for a new Mortgage. This can, depending on the timing of your mortgage and contractual repayment fees, be a costly exercise.
Capital Repayment Mortgages are a long-term investment and only really show their worth in the latter part of the mortgage.
Financial Advice if you’re not sure
Whilst there are a host of comparison and advice sites out there, if you’re not sure what is best for you, there are a number of independent Financial Advisors out there. Their fees might cost a few hundred pounds, but if they get you a better interest rate (and now really is the time for that) or identify a Mortgage with much cheaper fees, this can save money in the long-term.
MG Legal, your Conveyancing Solicitor Garstang are here for your Conveyancing needs, however, we are not Financial Advisors and so we do recommend that, unless you are fully confident securing your own Mortgage deal, you consider taking advice.
Once you have your Mortgage and your property price agreed, contact MG Legal by phone, email, web-contact form or at any of our offices in Lancaster, Longridge or Garstang. We will provide a comprehensive quote within a few minutes, which will include our fees and any other fees, such as Land Registry and Search Fees so that you know exactly how much it will cost. Many Conveyancing firms like to offer a quote that does not include other fees to make their quote seem more competitive and then later surprise you with the unavoidable extras once the process is underway.
We are still working during the Coronavirus lockdown and whilst we have put in place certain measures to protect both staff and clients, you may rest assured that we will still be actively working and we will be contactable throughout this time.
Get in touch with MG Legal for your quote and as soon as you confirm you wish to accept this, we will have the ball rolling the same day.
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