Mortgage advisors everywhere are being quizzed about switching from interest only to a repayment mortgage. But why has switching from an interest only mortgage become so popular?
It’s clear to anyone who has even the slightest interest in the current economic climate that financial stability isn’t great. The ever changing (and let’s face it, ever rising) interest rates have done nothing to minimise uncertainty and stress amongst borrowers.
Mortgage lenders have found themselves busier than ever, due to the record number of customers wishing to secure the best deals; whether that’s a new mortgage, or remortgage of an existing agreement.
What does switching from an interest only to a repayment mortgage mean?
So, how do you decide if switching from an interest only mortgage is a good idea?
As you are probably aware, there are two types of mortgage available to borrowers. You can choose either an interest only mortgage or a repayment mortgage (also known as ‘capital and interest’).
With an interest only mortgage your monthly payments will consist of simply paying interest on the money you’ve borrowed. The full amount is then due when the mortgage term ends.
A repayment mortgage means you will pay off a bit of the capital (the amount you borrowed), plus interest every month. By the end of your mortgage term you will have paid off the entire loan.
The Pros and Cons
So, what are the advantages and disadvantages of switching from interest only to a repayment mortgage? Let’s take a look at both options in a bit more detail:
Interest Only Mortgage
Interest only mortgages are attractive because the monthly payments are lower than a repayment mortgage. This leaves the borrower with options relating to repaying the balance at the end of the mortgage term.
Some people choose to save additional money each month and keep it in a high interest savings account. The hope is that there will be enough money at the end of the mortgage term to pay off the remaining balance. Others may invest the money, in order to achieve the same outcome.
On the other hand, if you fail to save enough over the years you may be left with a difficult decision, potentially needing to sell your home to pay off the mortgage.
Interest only mortgages can also require a larger deposit, and you will ultimately pay more interest over the total mortgage term.
Benefits of a repayment mortgage include paying less interest overall (over the term), as the amount you owe decreases with every payment you make.
As the mortgage term reaches the later stages your payments will contribute more towards clearing the loan and less on interest. You may also be eligible for lower interest rates as the term progresses due to owing a lower percentage of the property value.
Bear in mind that only a small percentage of the capital is paid off in the early stages of the mortgage term, as interest on the amount you borrow is weighted more heavily at the beginning.
You also need to make sure that you can cover the higher monthly payments from the very start of the mortgage.
For borrowers considering switching from interest only to a repayment mortgage, there’s quite a bit to consider. Ultimately, your best option is to seek the advice of an experienced mortgage advisor. Together you can discuss your options and find the best solution for your personal financial situation.