The main difference between a repayment mortgage and an interest only mortgage is how the loan is repaid.
Repayment Mortgage
Each monthly payment covers both the interest and some of the capital, so the loan is paid off in full by the end of the mortgage term. This is the most common type of mortgage and is the safer option as providing you pay your monthly instalments on time, you are guaranteed to have repaid the mortgage by the end of the term.
Interest Only Mortgage
Each monthly payment only covers the interest on the loan, so the remaining capital is due as a lump sum at the end of the mortgage term.
Interest only mortgages can be more affordable in the short term because the monthly payments are lower. However, the total interest paid over the life of the mortgage is usually higher, and the borrower is responsible for repaying the remaining capital at the end. To get an interest only mortgage, the borrower must have a solid repayment plan for the remaining capital, such as savings, investments, or the sale of their property.
For a mortgage on your home, lenders normally have strict criteria about who can have an interest only mortgage and it is common practice for them to require an applicant to meet specific income levels, have larger amounts of equity and larger value properties.
Interest only mortgages are, however, the most common method of mortgage for a Buy to Let.
At Excel Mortgages we can not only help you work out if you are eligible for an interest only mortgage but just as importantly, does it suit your circumstances. “Just because you can, doesn’t mean you should!”