There are many different types of mortgage deal available to property purchasers: tracker, variable rate, fixed rate, and more. But whichever type of mortgage deal you choose, there may well be an additional option – do you want interest-only or repayment?

What is a repayment mortgage?

If you choose an interest-only mortgage deal, this means that you are paying off the interest on the money you have borrowed, but none of the capital, for the duration of the term. With a repayment mortgage deal, however, you will be paying off some of the capital each month, as well as the interest accrued on the total amount.

Most people who take on a mortgage do choose repayment mortgage deals. According to the Council of Mortgage Lenders, 74% of mortgages taken out in 2008 were repayment mortgages. They are the simplest types of mortgage deals and they carry the least risk.

With a repayment mortgage, your monthly payments will be made up of both a capital repayment and an interest repayment.

Capital repayments:

The ‘capital’ is the money which you borrowed in the first place, and many people prefer the knowledge that this amount is dropping as they make each monthly payment, as long as the payments are within what they can afford. If no capital repayments are made, the amount owed will stay the same throughout the length of the mortgage deal.

Interest payments:

The interest is the money which has accrued on top of the capital while you have borrowed it. Interest payments may vary greatly, according to base rate fluctuations and the amount you owe over time. The larger the total mortgage, the more interest will be payable on the amount each month, so with repayment mortgage deals the interest will lessen over time as the capital owed reduces.

With a fixed rate mortgage, the interest owed monthly will not vary with the base rate, but will stay the same for a fixed amount of time. But with a variable rate or tracker mortgage, the interest owed each month may vary according to base rate variations.

Should I choose a repayment mortgage?

Repayment mortgages are the most popular because they are considered to be less risky and simpler to understand. Therefore, they are suitable for most people looking for mortgage deals. It is reassuring to know that each month the total owed is going down, and there is the added knowledge that interest repayments will drop in accordance with this. This type of mortgage deal is perfect for first time buyers who want a straightforward way to pay off their mortgage which will allow them to budget effectively.

Interest-only mortgages are often chosen by buy-to-let investors, as they can claim back tax on mortgage interest. Often these investors will rely on the potential increase in the property market to make capital repayments at a later date.

Making your choice

When you’re choosing between interest-only or repayment mortgage deals, consider your current and possible future circumstances, as well as the effect base rate changes will have on your repayments, and be sure to make the necessary calculations to make an informed decision.

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,repayment mortgages