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Repayment Methods
There are two main repayment methods accepted by the UK’s lenders, ie. interest only and repayment. Anyone that has ever taken a mortgage is aware of these two factors.
The interest only method of repayment is that monthly payments only pay off the interest charged by the lender on the original loan taken out and It does NOT pay off any of the capital unless overpayments are made and providing all payments are made when due. This will leave you with the same balance that you started with when your chosen mortgage term expires.
The longer the term the more interest you will pay and reducing the term will not result in a reduction of your monthly payments as you are only paying off the interest.
Interest Only method is generally used in conjunction with a vehicle repayment, ie., an endowment or ISA, in which the client receives a lump sum to repay at the end of the same term of the mortgage. The clients may also receive a little extra to spend as they wish.
The value of these investment plans has dropped considerably in recent years leaving some borrowers with an unexpected shortfall due to the fact that investment vehicles are generally affected by the stock market and some borrowers are being left with a debt instead of a surplus.
Borrowers choose interest only method because, it is usually the cost, as paying the interest is cheaper than paying the interest plus some of the debt every month.
Repayment mortgages are where both the interest and capital are paid off simultaneously each month thereby reducing the amount of the debt throughout the term of the mortgage.
Today the borrowers have become more aware of the risks of investment plans, and are choosing repayment mortgages, as it guarantees to repay their mortgages at the end of the term. |
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* Buildings insurance covers the structure of the home
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