You will need less in your repayment vehicle.Your monthly payments will be less than the equivalent standard repayment plan. This provides a convenient compromise between a solely interest-only mortgage or entirely repayment home loan: At the end of the mortgage period, the loan amount will have reduced from £160,000 to £100,000 and you would pay off this balance using the repayment vehicle. The lender will calculate monthly payments to pay off £60,000 of the mortgage and cover the interest on the remaining amount. The balance of £60,000 would then be paid off as per a repayment mortgage as part of your monthly payments. You would also arrange a payment vehicle to pay into to cover the balance of the mortgage when it reaches the end of term.įor example, if you take out a mortgage of £160,000 you could have a repayment vehicle covering £100,000. With a ‘part and part’ mortgage you pay towards a portion of the loan amount on top of interest payments. nor payments to (and interest from) a repayment vehicle.Ī ‘part-and-part’ mortgage is a way of combining the two methods of payment.It’s important to note these calculations have very much simplified the process. Always talk to a specialist mortgage adviser to get an accurate comparison. Actual figures in your case may differ according to several influencing factors. Please note: this illustration should not be considered as mortgage advice. We’ll base our examples on a purchase price of £232,000, with the buyers putting down a 25% deposit and obtaining a mortgage of £174,000 over a term of 25 years. It’s best to show how interest-only and repayment mortgages might compare with some examples.Īt any point in time, there will be a huge variety of mortgage products and interest-only mortgage rates available.įor the sake of simplicity, we will look at scenarios with representative interest rates of 3%, 4% and 5%. This is sometimes referred to as a ‘capital and interest’ mortgage, to differentiate it from an ‘interest-only’ mortgage. This means that both the mortgage and interest decrease over the planned period of time until the loan is repaid. With a repayment mortgage, monthly instalments go towards paying off your mortgage amount as well as covering the interest. But, because the loan amount itself is not decreasing it means that you will be charged more interest over the loan period than if you had been paying off the mortgage each month. This will result in significantly lower monthly payments to the lender. With this type of mortgage, you just pay off the interest. They can pay off parts of the mortgage throughout the term and reduce the total amount.ĭifferences between interest-only and repayment mortgagesĪn interest-only mortgage differs from a repayment mortgage in a very significant way. This includes people such as contractors, freelancers and the self-employed. Interest-only mortgages can also present the same attractive low monthly commitments to people whose income may fluctuate. This can assist at times of possible rental voids. This choice allows them to maintain lower monthly expenses. You will also own your home, albeit with a mortgage on it.īuy-to-Let investors who purchase properties for rental purposes often opt this type of mortgage. This is because in many instances, the monthly payments will be cheaper than renting a property. In expensive areas, an interest-only mortgage is a convenient way to buy a property and help reduce the monthly cost. We have seen many different borrowers, including first-time buyers, investors, and people moving homes, benefit from this model. Who might be suited to an interest-only mortgage?Īn interest-only mortgage is helpful for individuals with specific borrowing needs.
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