Polls / June 23, 2010

Do you know the difference between an interest only and a repayment mortgage?

The difference between an interest only mortgage and a repayment mortgage is known by 34% of respondents to the latest eZonomics online poll, with 66% of respondents saying they don't know.

Ways to pay for your home, sweet home
Deciding between an interest only mortgage and a repayment mortgage is just one of many decisions homeowners (or potential homeowners) make. While the differences between the two types of mortgages might sound complicated, clues are in the names.
Interest only mortgages - as the name suggests - require mortgagees to pay monthly interest payments only. The principal (or the lump sum amount borrowed) paid back at the end of the agreed term.
With repayment mortgages, however, mortgagees' monthly payments include both the interest and a portion of the principal. At the end of the agreed term the full amount borrowed is fully repaid.
The United Kingdom's Money Advice Service website has an online calculator that can be used to compare monthly payments for an interest only and a repayment mortgage.

Don't forget to factor in the lump sum in an interest only mortgage
Interest only mortgages are less costly in the short term - the monthly payments are lower - but it's important to remember the lump sum will ultimately need to be addressed.
These mortgages require a particular level of discipline and planning. If property prices fall during the term, for example, it might not be possible to sell the property at the original price to clear the loan.
Homeowners should seek advice to ensure they get the best type of mortgage for their individual situation and needs.

House pricesMortgage

eZonomics team
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