Interest Only Or Repayment Mortgage. Which To Choose?

By: Chris Clare

Peoples perception of finance and loans has changed quite considerably over the last decade or so and, with so many lenders offering what would appear to be bargain deals, getting finance is something that is often entered into with little regard for the monetary consequences. Look at the amount of people who opt for interest only mortgages over repayment mortgages. But if money is borrowed it will have to be paid back at some stage. What this article aims to do is show the ways that mortgages can be arranged with the onus on repayment.

To understand this basic principle you need to first understand how mortgages can be set up. Excluding the many types of interest deals you can get on the market there are essentially two types of mortgages, capital repayment and interest only.

No matter which one you choose there will be some form of interest to be paid. With a capital repayment mortgage you pay interest on the mortgage plus a small amount of the capital borrowed so that the loan is gradually reduced every month. If you choose this form of mortgage over, say, a 20 or 25 year period, at the end of the period the loan will be paid off.

Interest only is equally simple in so much as all you give the lender is interest. The capital stays outstanding in its entirety until it is repaid in some other way. You are probably thinking why on earth anyone would have a debt that does not get repaid. Well in answer to this there are quite a few ways that interest only mortgages can be repaid normally. One way is to arrange something called a repayment vehicle.

An endowment policy is one method which up until recently proved a very popular choice. Basically an endowment is a life insurance policy designed to run in conjunction with the timespan of the mortgage but which also generates cash through contributions and returns on investment. Think of it as a separate account that by the end of the mortgage term will have enough money in it to pay off the original debt.

What needs to be taken into account with an interest only mortgage is that you only need to accrue enough cash to pay off the original loan and there are other methods besides endowment for achieving this goal. One such method is to take out a pension policy. As well as yielding a pension at the end of the term there will be money left over that could be used as your repayment vehicle. You will need to be sure however that when the policy matures there is enough tax free money to both pay off your debt and give a pension payout that you can live on. Pension link plans are also beneficial because of the tax savings made.

There are several forms of repayment vehicle nowadays, such as savings plans, personal equity plans and even personal savings accounts. In truth any type of savings, including bonds and unit trusts can be used as long as they are going to be enough to pay off the whole mortgage loan. But remember that all investment plans come with some risk. You are putting your money in an unpredictable market so you can be at risk if it doesn't perform as hoped.

So in conclusion there are repayment mortgages and there are interest only mortgages but with interest only you have the added responsibility of ensuring you have a suitable repayment vehicle. It is always recommended that anyone getting a mortgage should seek professional mortgage advice whether it is for repayment or interest only mortgages but that advice is far more necessary if you are considering interest only with a repayment vehicle because the risks associated with getting this choice wrong can cost many thousands of pounds.

Article Source: http://www.retirementlivingarticledirectory.com

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