Interest Only Or Repayment Mortgage. Which To Choose? | Mortgage

By ChrisClare
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Whilst most people appreciate that when borrowing money there is a need to repay it, in this day and age with interest only mortgage abound the ultimate goal of actually repaying the mortgage can be sometimes lost. In this article we discuss the ways mortgages can be set up and the overall need to ensure that some way repayment needs to be a priority.

Regardless of the many types of mortgage interest deals available in the market place there are essentially only two types of mortgage available, interest only and capital repayment.

All mortgages, capital and interest only, carry some level of payable interest. With capital repayment it is fairly simple. You pay off the interest as well as a small portion of the capital so that each month the level of the debt is reduced. By paying your mortgage off this way, and by reducing the debt each month, by the end of the 25 year term, presuming it is 25 years, you can safely say the whole debt will be repaid.

With an interest only mortgage it is only the interest on the loan that is being covered every month, the loan itself remains the same. In order to reduce the loan other methods of payment must be considered. One option is to arrange for a repayment vehicle.

One method which used to be very common but is now less in favour is an endowment policy. An endowment is effectively a life insurance policy which runs the duration of the mortgage but which also accrues cash through contributions and returns on investments. The principle behind this is that by building up this cash pot, by the end of the term of the mortgage you have amassed enough capital to pay off your debt in full.

However, with an interest only mortgage you really only need to gather enough money to pay off the initial loan so there are other ways to go than just endowment. A pension policy can also generate enough cash to give out a lump sum as well as a pension, and so could be employed as your repayment vehicle. All you need to assure is that the money you are paying into a pension policy is enough to guarantee that at the end of the term you have sufficient tax free money to pay off your debt on your home whilst also leaving enough extra to give a pension. Pension link mortgages can be a very attractive option, in particular when you consider the tax benefits attached to them.

Savings plans, personal equity plans and even personal savings accounts can all be used as repayment vehicles now. But in honesty any type of savings plan, including unit trusts and bonds, can be used as long as they create a sufficient lump sum. However, with that, it must be remembered that with any sort of investment plan you are always at risk if it doesn't produce the returns you were hoping for.

So in conclusion there are repayment mortgages and there are interest only mortgages but with interest only you have the added responsibility of ensuring you have a suitable repayment vehicle. It is always recommended that anyone getting a mortgage should seek professional mortgage advice whether it is for repayment or interest only mortgages but that advice is far more necessary if you are considering interest only with a repayment vehicle because the risks associated with getting this choice wrong can cost many thousands of pounds.

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