When you’re taking on a new mortgage deal, there are a huge number of things to think about. But one fundamental choice you will need to make somewhere along the line is whether you want to be paying off capital each month or only the interest on that capital.

An interest-only mortgage is one in which you only pay off the interest accrued on the total capital each month, meaning the capital owed remains the same throughout the length of the mortgage deal.

Interest-Only Pros:

According to the Financial Services Authority, four in ten households have interest-only mortgages. There are a number of pros to interest-only mortgage deals, primarily that monthly repayments will be significantly lower than with a repayment mortgage. This means that you will keep more of your income each month to spend on yourself, or on home improvements, for example. In fact, with a very low base rate, an interest-only mortgage deal can seem almost impossibly cheap to maintain, depending on the type of mortgage you have.

An interest-only mortgage is also sometimes considered to be preferable in the eyes of buy-to-let investors. This is because they are able to claim back tax on the mortgage interest, and they may reason that rises in the property market will enable them to make capital repayments later on.

Also, with interest-only mortgage deals, you can choose a savings account or repayment vehicle which gains the best interest rates and is tax-efficient. If you can manage this well alongside the mortgage and keep up the payments (and not spend the money you have saved), this option could even save you money in the long run.

Interest-Only Cons:

Interest-only mortgages are considered risky, as they do not provide the borrower with a complete outline for how they will pay off the capital they owe, and this can cause problems when the mortgage term ends if there is outstanding debt and no alternative means of repayment.

Also, while a repayment mortgage may be more expensive in the short term, in the long term you will be reducing the total capital owed which will, in turn, reduce the interest paid as well. With an interest-only mortgage deal, however, the capital will still be payable in full right up until the end of the mortgage term – often 25 years later.

Recommendations

With an interest-only mortgage deal, you will ideally use a separate savings account or repayment vehicle which you also make monthly payments into to ensure you will be able to pay off the capital by the end of the mortgage term. Otherwise you will need to know that there is capital available to pay off the remaining amount owed by the end of the mortgage term.

A repayment vehicle can be an ISA, for example, which you make monthly payments into in order to accrue a lump sum which you can use to pay off the total owed at the end of the mortgage term. You will need to monitor these repayments carefully because different savings options will have different interest rates, which may vary over time, so it’s important to make sure you continue to pay in the right amount to stay up-to-date, or you might be in for a nasty surprise later on.

Author Bio: At Credit Choices you can compare mortgage deals online. Whatever your individual mortgage needs, we can help you find the best deal.

Category: Finances
Keywords: mortgage deals,mortgage deal,mortgages,interest only mortgages