Repayment or Interest Only Mortgages (UK)?
Basically, there are really only two main types of mortgage, Repayment and Interest. It’s the many variations on them which make things seem more complicated than they have to be. But don’t worry! It can all be kept fairly simple by quickly learning about Repayment and Interest mortgages.
Interest only mortgage is an arrangement where you’re only paying off the interest on the loan. None of your capital debt is being repaid directly. It’s to be repaid by the end of the mortgage term by making simultaneous monthly payments into an investment fund. The idea is that this fund has hopefully grown enough to pay off the capital and leave you with a surplus. To do this your mortgage salesperson may offer you an investment “side” or “by product” (what they’ll claim is a suitable type of investment to pay off the capital part of the mortgage).
Anyway before accepting anything, always shop around for others. You’re probably looking for some type of ISA. A typical arrangement might be an endowment mortgage - at least now they are falling badly out of fashion. Endowments are a mix of savings, investments and life assurance wrapped up into an insurance policy. They were very popular in the 80s and 90s but became troublesome as the “side” investments have done worse than expected. In other words, people won’t own the property because they won’t have paid off the loan. If you by chance already have an endowment and want to get rid of it you can just “sell” it to the company that originally sold it to. However you can make more by selling it on the open market. There are a lot of firms that will do this for you.
Repayment mortgage is the traditional type of mortgage where the property is actually guaranteed to be yours at the end of the mortgage term - provided you have repaid the loan. Your mortgage debt is divided into capital repayments (repayment of the money you borrowed) and interest payments (repayment of the interest you’re being charged for the loan).As you pay off your mortgage every month you’re paying off a bit of capital and a bit of interest until the full debt is repaid. You usually pay off mostly interest in the early years and then gradually more of the capital debt. It may seem as if this is costing more but that’s because unlike the other types of mortgages you’re paying off the capital and not just the interest.