Interest only or Repayment?

If you are considering a new mortgage you may be wondering about the difference between interest only and repayment mortgages. Mortgages expert Paul Demarco helps explain the difference.

A repayment mortgage for a residential property purchase is the most common form of borrowing against a property. It is the most sensible way to repay your mortgage and as long as you continue to repay your mortgage payments, at the end of the agreed term, your mortgage debt will be nil.

Lenders have very strict criteria with interest only mortgages, unless you already have one in place. Some of the things they look for are that there is an acceptable source of funds to repay the capital at the end of the mortgage. A minimum £150,000 equity in the property is required for some lenders.

Repayment vehicles

Where any part of the mortgage is on an interest only basis the maximum Loan To Value (LTV) for the overall lending is 75%. It is also important to ensure that a repayment vehicle has to be in place like stocks and shares, an ISA or an Endowment plan to ensure that the mortgage balance can be paid upon completion. Some lenders do not offer interest only mortgages at all for residential purchases.

The exception

One instance where interest only is acceptable is on a buy to let property. As long as this is not your main residence, this facility is often offered by lenders with few or none of the above criteria applicable as it is in essence, an investment. The downside of this, of course, is that unless you sell the property, the actual mortgage will never be repaid.  Repayment mortgages are also available for buy to let mortgages as well.

To summarise, in relation to a residential mortgage it is almost always best to take a repayment mortgage.  For buy to let, it depends on a lot of factors such as affordability, tax implications and timeframe for keeping the property.

As Independent Financial Advisers, ESPC Mortgages can help will all aspects of understanding your budget, applying for a mortgage and dealing with the relevant insurance requirements. Pop in for a no obligation chat with the team at our Edinburgh Showroom or give them a call on 0131 620 8680.

Paul Demarco

Want to know more?

Paul Demarco is a Financial Planning Consultant who helps clients with all their mortgage needs and requirements, identifying any other gaps that they may have and advising on a solution to any potential gaps.

You can call him on 07778 066595 for more information.

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