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When you take out a mortgage, you’ll need to decide how you’re going to repay it. With an interest-only mortgage, your monthly payments only cover the interest charged on your loan. With a repayment mortgage, your monthly payments are also used to pay back the initial sum you borrowed.
So, should you choose a capital repayment or interest-only mortgage? And is an interest-only mortgage better than repayment? Find the answers to these questions in our guide below.
Always remember your mortgage is secured on your home. Your home may be repossessed if you do not keep up repayments.
With a capital repayment mortgage, you’ll make monthly repayments for an agreed period of time (also known as the ‘term’) until you’ve paid back both the capital and the interest.
This means that the amount you owe will decrease every month. And, as long as you keep up the repayments, your mortgage will be fully paid off at the end of the term. Having a fully paid off mortgage means you own your own home and have a saleable asset.
With an interest-only mortgage, your monthly payments only pay off the interest charges on your loan, not any of the capital borrowed.
This means that your payments will be less than on a repayment mortgage. But at the end of the term, you’ll still owe the original amount you borrowed from the lender.
To fully own your property by the end of the mortgage term, you will need to repay the whole balance by:
It’s important to note that most mortgage lenders will ask how you intend to repay your loan – and not all lenders will accept all repayment strategies (for example, inheritance).
Each lender will have their own criteria, which is why it’s important to get in touch with a Specialist Financial Adviser to discuss your options.
Yes, as long as your mortgage lender approves you for a repayment mortgage. Lenders carry out an approval process as you will typically be moving to much higher monthly repayments. Options for switching to a repayment mortgage from an interest-only mortgage may include:
The process of switching can vary from lender to lender and differs depending on whether you’re carrying out a product transfer with your existing mortgage provider, or a full remortgage with a new one.
Many borrowers treat this process as an opportunity to search the market for a better interest rate, which is something a reputable mortgage broker can help you with.