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When it comes to searching for mortgages for first time buyers, it can be a daunting experience choosing the right mortgage; it is a decision that will shadow you for the next 30 or so years. So making the right choice to get the fitting mortgage rate to suit your circumstances is a choice to be made shrewdly, that choice for the majority will come down to a Repayment Mortgage or an Interest Only Mortgage.
What is a Repayment Mortgage? Under a Repayment Mortgage you will be paying a combination of both the interest and the capital every month. In the first few years, the greater part of your monthly payments will be going on the interest with very little of the payments covering the capital. Nonetheless as time progresses, a larger sum will be paid, and the more capital paid off, the less the interest becomes with each passing year. With the fixed terms end you will fully own your house, having completely paid both the capital and interest. What is an Interest only Mortgage? With the Interest Only Mortgage (IOM), as the name suggests, only the mortgage interest will be paid every month, with the capital payment intact. The benefit of an IOM mortgage is the repayments are less than they would be on a Repayment Mortgage, though the idea is you should be making a second monthly payment into an investment vehicle so at the end of the fixed term, you can pay the capital off in a lump sum to the mortgage lender.
Repayment Mortgages - Pros and Cons: Repayment mortgages are the safe option in essence, so it’s no wonder that they are the most popular type of mortgage in Britain. As you pay off the mortgage, you’re infusing equity in the house and are more unlikely to see the property go into negative equity under the Repayment Mortgage, if you decide to move it should be easier to gain a new mortgage on the next property with that equity in your house. While the payments are not as elastic as an IOM, you have the capacity to modify the fixed term length of the mortgage at a forthcoming date to even 30 or 35 years to keep the monthly payments down to a manageable level. It should also be pointed out that some, not all; Repayment Mortgages will allow you to make lump sum payments if you come into some money at a future date. The drawbacks; any amendments in the mortgage agreement, i.e. extending the fixed term or even making an extra lump sum payment, could result in the mortgage lender administering a fee to process the changes, what the bill is will depend on the mortgage lender but it should not be too brutal.
Interest Only Mortgages - The Positives and Negatives: With IOMs, the benefits and drawbacks are correlated; many of the subjects involved are two sides of the same coin. For instance, IOM’s are more susceptible to market forces than Repayment Mortgages are, but depending on what the market is doing it can be a blessing or a nuisance. An interest rate rise would be the best example, a £100,000 mortgage over 25 years with an interest rate change of 1% would lead to an increase of £65 on a repayment mortgage, but £84 increase on an interest only mortgage. Yet the benefits are as embraced as the drawbacks are not, if interest rates go down by 1%, the payments reduce by the same amount as stated above. Not only can the payments ebb and flow over a longer spectrum than Repayment Mortgages, but the monthly repayments are more adaptable than on a Repayment Mortgage, as you are only paying the interest on the mortgage, the payments each month are lower, on a £100,000, 25 year mortgage for instance you would be saving £2,000 a year on mortgage repayments. What is not promoted about an IOM is that in reality you should be saving into another investment vehicle, generating enough capital so at the closing of the mortgage, you can pay the lump sum, which is the actual capital, off to the mortgage lender. So an IOM is if truth be told, only cheaper if you if you decide not to make the second payment, many people head down this way, gambling on the prospect that by the time it comes to pay the lump sum off, house prices would have surged upwards enough to pay off the mortgage and have enough left over to scale down into a smaller house. It should not be forgotten that it’s not just your property price that has risen, all other property prices will have shot up also, jeopardising any profit you’d produced not being enough to even scale down. The only time gambling on house price inflation is expected to succeed is if the property is a buy-to-let, as you would be earning on and covering the rent, and could then sell the property to settle up the capital, another factor is that if interest rates are as low as they are at present, those on IOMs don’t by and large realise they should be making more payments into the investment vehicle to make paying the lump sum off easier in the future. An IOM also results in you actually paying more cash over the 25 years than a Repayment Mortgage; those on a Repayment Mortgages are paying capital which shrinks interest over time, IOM capital is static as the capital is not being paid off. Which leads to the final negative of an IOM, the property will not gain any equity during the time of the mortgage.
As you can see there is more to chew over regarding IOM’s as the unpredictable factors can be much greater than with Repayment Mortgages, when we get down to the bottom line, the choice comes down to if you would rather be conservative with a Repayment Mortgage, or be ready to speculate and go for the Interest Only Mortgage. You would not be fixed into the mortgage agreement as it is when you sign up; both are obliging in their own ways, the IOM just has added elasticity. If you are put off by the risk of an IOM, it is possible to change to a Repayment Mortgage after a specified period of time. IOM’s are more attractive as they are of more of help getting first time buyers onto the property ladder, if this is your objective, then it is seriously worth considering, if it’s a long term consideration, then make sure you have an investment plan in place to pay the capital or it could be a costly mistake to regret.
Wilbur O’Chaffin works at JustMortgageAdvice.com, who specialise in first time buyer mortgages and look to find the best mortgage rates for all their customers, first time buyers or not.
