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The Difference Between An Interest Only Mortgage And A Repayment Mortgage

Updated on July 11, 2010

Once you have made the decision to buy a house you have to start doing some work and look into how you can afford to make this purchase. If you are not from a wealthy family who will lavish you with a never-ending stream of cash, you will have to do what the majority of people end up doing. You are going to have to sign up your first mortgage deal.

During this time you will need to learn a lot of new jargon like the types of repayment plans available as well as the different types of mortgages there are such as fixed rate and variable rate.

First things first. When you borrow money from a financial institution you always have to pay interest on the total amount. This is what happens with credit cards, store cards and when you apply for student loans. The same thing applies when you get a mortgage except that you are borrowing a much larger sum so the total interest will also be on a much larger scale.

With a mortgage deal there are 2 types of basic repayment plans that you can choose to apply for.

  • An interest only home mortgage
  • A repayment mortgage

Is an interest only or a repayment mortgage the best choice for you?
Is an interest only or a repayment mortgage the best choice for you?

An Interest Only Home Mortgage

An interest only home mortgage means that the bank calculates how much your total loan will cost you in interest according to the rate that has been set. This figure is then divided by the length of the mortgage contract. A mortgage term can be whatever you want it to be but the normal length is 25 years. You then pay this on a monthly basis until you come to the end of the agreed mortgage period.

As you have only paid the interest, you still have the actual capital to pay back to the bank. Most mortgage companies will expect you to set up a separate savings plan in order to ensure that by the end of the 25 years you have accumulated enough to pay off the complete mortgage.

It used to be the financial institutions’ responsibility to ensure that individuals set up a separate payment scheme but they no longer have to do this. They are only obliged to inform you that this is recommended. If you choose not to take some sort of provision, you could risk losing your home and the investment you have made in it.

A Repayment Mortgage

A repayment mortgage, which is also known as a capital & repayment mortgage calculates both the total mortgage with the interest that is accrued over the lifetime of your chosen deal. This figure is then divided equally over the period and you end up paying a little bit of the interest as well as the capital each month.

In the beginning you are paying mostly interest but there comes a time when the amount of interest diminishes and you are repaying more of the capital. By the end of the term you will have completely paid off everything.

The repayment mortgage is a great choice because you will know that by the end of your contract, you will have nothing left to pay and your home is completely yours. This does of course work out to cost more on a monthly basis.

In order to choose the right type of mortgage to suit you make a start on some online research to ensure you have taken on board all the relevant information to make the right choice.

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