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Repayment or Interest Only Mortgage
Repayment or Interest Only Mortgage are two ways or repaying mortgages. Capital Repayment and Interest Only is a decision you need to
make when applying for your mortgage quote. You, the borrower, need to decide which of these is going to suit you best. Your mortgage
adviser will not be able to make this decision for you. The following is information about the differences between repayment mortgages
and interest only mortgages.
Repayment Mortgage
Repayment mortgages are mortgage loans that require your repayments to be made up of both capital and interest. This means that the loan will reduce in size,
assuming you make your repayments correctly and on time, throughout the loan term. To begin with, you will pay more interest than capital, towards
the end, you will pay more capital than interest.
As long as you have made each repayment correctly and on time, your mortgage loan should end at
the term you originally specified. See the graph below for an example of how your mortgage loan size should reduce over the term of the mortgage loan.
Interest Only Mortgage
Interest only mortgages are loans that require your mortgage repayments to be made up of just interest and no capital. This means that the original loan
should stay the same size throughout the term of your mortgage as you are only paying off the interest each month. The idea is that you save money
in an investment scheme (e.g. ISA, Endowment) with the expectation that the investment will make enough money to cover your capital loan at the end
of the mortgage term.
Investments can go up and down and there is no guarantee that it will be worth enough at the end of the mortgage term, but there
is the possibility that it will be worth more. You could have a shortfall that you need to make up or you could have more money than you need, in which
case you have extra to spend as you wish. See the graph below for an example of how your loan size should stay the same and your investment could grow
over the term of the loan.
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