Competitive mortgage loans from leading mortgage providers are basically divided into two main categories, repayment and interest only. Repayment mortgage loans are also known as capital repayment mortgages because your monthly payments contribute towards the total amount borrowed and the interest payable. Repayment mortgage loans are also paid over a specified period and assuming you make all your payments, the loan is guaranteed to be paid in full by the end of the mortgage term. Early on in the term of the mortgage your repayments will mainly go towards paying the interest on the loan and as the years progress your payments will be paying off greater amounts of the capital each year.
Repayment mortgage loans can have a number of advantages. Unlike mortgages which are linked to the performance of the stock market, like ISA (individual savings plan) interest only mortgages, you don’t have the risk of being dependent on fluctuations in the stock market. You are also less likely to suffer from negative equity because the amount you owe is reducing with each monthly payment. You will also enjoy an increase in the level of equity in your property as you pay off the capital each year, assuming that your property does not drop in value. As a result of this you will probably find that when it comes time to move up the property ladder you’ll find it easier to obtain a mortgage and will have a significant amount or equity to use on your next investment. A disadvantage of repayment mortgage loans is that if you were to move house in the early years you would probably still have to take a mortgage for the same twenty to twenty five year terms because only a small amount of the capital will have been paid off. This means that you will end up paying for a combined longer period. A further point is that you would not be able to benefit from good performance of the stock market whereas mortgages linked to the stock market could enjoy an early pay-off and even an additional lump sum at the end of the mortgage term.
Interest only mortgage loans require you to only pay the lender the interest on the amount borrowed on a monthly basis. This means that you must establish a separate long term investment plan that will provide the funds to pay off the full loan amount in your planned time frame. There is no repayment term since you pay off the mortgage loan once your planned investment has accrued sufficient funds. Interest only mortgage loans continue at the rate agreement you have chosen until your funds are available to pay back the borrowed capital. The type of investment plan can be an ISA, an endowment or a pension. An advantage of interest only mortgages is that you can choose the investment that best suits your situation and is tax efficient. You also have the possibility of being able to pay off your mortgage sooner or to receive a lump sum at the end of the period should your investment perform above expectations.
The disadvantage of interest only mortgage loans is that your debt remains constant throughout the mortgage period and you are taking a risk on being able to pay back the capital because you have no guarantee that you will have the funds to pay off the mortgage at the end of the repayment period. This is because your investment may not perform as expected at the outset.