What Is The Difference Between An Interest Only Mortgage And A Repayment Mortgage?

There are many schemes offered by mortgage lenders from which prospective borrowers can choose.
These can be divided into two broad methods of repayment:
Capital & Interest method: - With a capital repayment mortgage, the capital and interest elements of the loan are paid off with each monthly instalment, with the balance reducing over the length of the loan. Therefore by the end of the mortgage term, assuming all mortgage payments are made, you have paid off the balance in full and you therefore own your property outright.
Interest only method: - With an interest only mortgage the balance of your mortgage stays the same throughout the mortgage term. Interest and usually a premium in a suitable investment vehicle are paid monthly. At the end of the term, the proceeds from the investment vehicle are intended to repay the mortgage. This amount will depend on the performance of the investment vehicle. If you do choose an interest only mortgage you are responsible for ensuring that you have sufficient funds available to repay your mortgage at the end of the term.

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An interest-only mortgage means repaying the lender the interest charged on the sum borrowed. The sum borrowed - or 'capital' in finance-speak - is therefore outstanding for the life of the mortgage, and only gets paid off at the end. Typically, a separate investment, for instance, a stocks and shares ISA, will have been taken out at the start of the mortgage and monthly payments made into this fund to cover the loan. However, there is a risk that this investment may not fully repay the original loan amount as has happened recently with some endowment mortgages.

A repayment mortgage differs in that the amount borrowed is paid off gradually along with the interest it accrues. So long as each payment is met as agreed, a repayment mortgage is guaranteed to be settled in full.

Both types of mortgage are affected by the fluctuations in interest rates, the lower the rate of interest as set by the Bank of England, the lower your monthly payments.

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