Interest Only vs Repayment Mortgage

The main two types of mortgage are interest only and repayment. It is important to understand what the difference between them is so that you can choose which will be the vest for you.

With an interest only mortgage, you only have to pay the bank the interest each month. Then when the term of the mortgage is up, you will be expected to provide them with the lump sum that you borrowed. With a repayment mortgage you will be expected to pay back both the interest and some of the money borrowed, so that by the end of the term you will have paid it all back.

There are advantages and disadvantages to both types. Some people would rather know that they are paying back what they owe each month and therefore want a repayment mortgage. It is usually the best way to do things financially because a mortgage rate tends to be higher than a savings or investment rate and so anything you can make on money you are putting a way to pay the mortgage with will be less than you will save by paying it off the outstanding balance.

However, if you are only paying off the interest, you can save up the money elsewhere and then if you wish, use it for other things. This is not always recommended because you do need to make sure that you have enough money to pay off the mortgage at the end of the term and if you keep spending what you have saved up, you could be in trouble. However, the flexibility of it, can be very appealing.

It is worth comparing the mortgage rates between the two types as well. You may find that there is a significant difference and this could help you decide which to go for. It is worth trying to predict the total costs and thinking about if you invested the money how much return you may get and which will be a better financial option. If you think there is any chance that you will not have enough self-discipline to save the money up ready to pay off the loan, then you should have a repayment mortgage as you could risk losing your home otherwise.

So deciding on which type of mortgage to go for can depend on the price and whether you think you can trust yourself. You also need to consider whether you think you would be better off with the more flexible option.

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