With a repayment mortgage, your mortgage payments are made up of both interest and capital. This means your mortgage is gradually paid off over the mortgage term. Usually repayment mortgages are weighted to mainly interest at the beginning of the repayments.
On an interest only mortgage, you only pay interest to your lender throughout the mortgage term so your mortgage balance will not reduce. At the same time it is your responsibility to put money into a separate investment which should grow to be able to pay off your mortgage balance at the end of your mortgage term.
Which is Better – Interest only or Repayment?
The advantage of a repayment mortgage is that you don’t have to worry and think about a separate investment programme. Also, there have been some poorly performing endowment policies which have failed to deliver the necessary investment. The stock market is also quite volatile an inexperience investor (and even experienced investor) can end up with less money than they started.
However, interest only mortgages give you more flexibility in when you make contributions to your investment plan. There is also the scope for making a better rate of return on your investment. About 20% of UK mortgages are interest only; their number has increased, in part, due to the increased cost of buying a new house in the UK. Therefore, many new first time buyers choose an interest only mortgage because it makes mortgage repayments more affordable.