Capital & interest (repayment) or interest only mortgage?

Capital & interest (repayment) mortgage

With a capital and interest (repayment) mortgage, you pay your lender a monthly sum, which is partly repayment of the outstanding debt and partly interest on the outstanding loan. Month by month the debt reduces.

Every time you move home or remortgage, you might have to take out a new loan, and therefore start your repayments from scratch.

This will depend on the amounts being borrowed and conditions in your existing terms. Remember you pay only a small amount off the mortgage in the early years.

However, providing you make all your monthly payments in full, the loan will be paid off at the end of the agreed term (which is usually 25 years, but could be longer or shorter).

Pluses:-

• Easy to understand.
• Loan guaranteed to be repaid if all payments made.

Minuses:-

• Very little capital is repaid in the early years of the loan.
• Monthly payments higher than for an interest-only mortgage.
• You'll probably need to arrange separate life assurance.

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Interest only mortgage

As the name suggests, you simply pay interest to the lender during the course of the loan. Your debt never reduces and at the end of the agreed mortgage term you owe your lender exactly the same sum as at the outset.

Monthly payments to your lender are lower than for a repayment-type mortgage, but you will have to clear the debt at the end of the term.

In order to pay off your mortgage you will normally have to make payments into a separate investment plan, which is designed to build up sufficient funds to repay the loan in full.

An endowment policy is designed for the long term but should your circumstances change, seek independent advice before you cash in your endowment as there are alternatives that may be more suitable for you. If you want to alter your endowment or if you have any potential 'shortfall', an IFA can advise you on what to do or even recommend an alternative source of mortgage repayment.

Pluses:-

• May pay off your mortgage in advance of the expected date if funds perform well, and therefore save future mortgage interest payments.
• Built in life assurance.
• Tax efficient.

Minuses:-

• Rely on investment performance.
• Potential 'shortfall' in value of fund when mortgage is due to be repaid.
• May have to make additional investments to build the required lump sum to match the outstanding mortgage amount.

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What will you have to pay us for our services?

You can choose how we are paid for mortgages; pay a fee of typically £500 or we can accept commission from the product provider.

You will receive a key facts illustration when considering a particular mortgage or further information about a particular home reversion scheme which will tell you about any fees relating to it.

Your home may be repossessed if you do not
keep up repayments on your mortgage.

The value of your investments and any income from them can fall as well as rise and investors may not get back the amount invested.

The information and content of this site is intended for UK consumers only.