Many homebuyers like the simplicity of the repayment option. Every monthly payment you make reduces the interest on the loan and some of the capital (the amount borrowed) until the entire loan is paid off by the due date. This steady and reliable approach makes the repayment option low risk and so it appeals to borrowers who want the absolute security of knowing their mortgage will be paid off by a certain date.
As the name suggests, with an interest-only mortgage your monthly payments are smaller and cover just the interest on the loan. At the same time, you make regular contributions to separate investment or savings schemes such as an individual savings account (ISA) with the expectation that it will produce a large enough lump sum to pay off the capital you still owe.
There is risk attached to this type of mortgage. An investment dependant on stock market performance may go down as well as up. In the past, when the economy was booming, endowments provided enough cash to pay off mortgage capital and then deliver a lump sum to the homeowner. But without a crystal ball, you run the risk that the opposite will happen and your investment may will not grow sufficiently if there are more lows than highs. This could leave you with a shortfall at the end of the mortgage term. The stockmarket slump over recent years has left interest-only mortgage holders with shortfalls which they must make up before the end of their mortgage term.
Because of the uncertainty attached to this type of repayment method, it tends to suit borrowers who are prepared to accept some risk and be realistic about the potential growth of investments. It also means you have to trust yourself to keep your mitts off the the investment and not dip into it.
But as your lifestyle and appetite for risk changes, you may decide to switch from a repayment mortgage to an interest-only loan or vice versa. This can usually be done fairly cheaply and easily and can help you adjust the size of your monthly payments for a while if you need to.
Many people shy away from Interest only Mortgages, but I like them.
They give you a degree of flexibility but can only be recommended if you are wise with your money.
You can select an interest only mortgage and over pay it month in month out with what you can afford. If then the Christmas period takes its toll or the holiday season finds you craving foriegn climes, you merely have to make the interest payment freeing other monies.
You have to be disciplined however because if not you will find yourself still owing the capital at the end of the term.
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