There are two main type of mortgage when looking at how they are repaid. They are interest only and repayment. Most people will have a repayment mortgage and it might be the one that you are likely to go for as well. However, you need to know what each type is and think about which will suit you the best so that you can decide properly whether an interest only mortgage should be an idea that you abandon or embrace.
What is an Interest Only Mortgage?
This is a type of mortgage where you only have to repay the interest every month and you do not have to make any repayments of the lump sum that you have borrowed. A few generations ago it would be the case that interest only mortgage holders would invest money in an endowment. This is a type of investment which holders would pay into monthly in the hope that it would increase in value enough to repay their mortgage at the end of their term. This worked well until there were financial problems and the stock market crashed and a lot of people had to start paying more in so that they could be sure to meet their target when their mortgage was due to be repaid. This put a lot of people off investing in endowments and many people switched to ISAs and other methods of investment, often using a financial advisor to guide them.
What is a Repayment Mortgage?
With a repayment mortgage you will simply repay some of the mortgage as well as the interest each month. This means that the amount that you owe will shrink over time and you will whittle away the mortgage. This can be something that some people prefer as they feel it is lower risk as they will be reducing what they owe. It means that if they move house, they will not have to carry over such a big mortgage which might mean that they will be able to borrow more money. They also just feel happier and more secure knowing that it is guaranteed that they will repay all of the mortgage. However, this could be a more expensive way to pay for a mortgage compared to the interest only as the money invested could increase in value a lot and it may even mean the mortgage could be repaid early or once it is repaid there could be money left over. Obviously, the reverse could happen depending on how good the investment has been.
Which is Best for me?
Some people really like a repayment mortgage because they like the security that they are being forced to repay the money they have borrowed and they like to see the amount reduced a bit each month. This makes them feel happy that the debt is disappearing. However, there are others that like the fact that they have more freedom and they can invest money and only repay the interest. It means that there is a chance that they might be able to make lots more money than they need and they can change where it is invested if they want to, if they feel it could make more elsewhere. However, there is a temptation that you just pay the interest and do not worry too much about putting money away to pay off the mortgage. There are people that get to the end of their mortgage period and find that they do not have enough money to repay the loan and they will have to sell it to cover the cost, which is not a good situation to be in. So, you will need to think what might be best for you considering how you are with money.