Understanding Interest-Only Mortgages
An interest-only mortgage requires you to pay only the interest each month, which usually results in lower monthly repayments. However, at the end of the mortgage term, you still owe the full amount borrowed and must repay it as a lump sum.
Repayment Mortgages Explained
With a repayment mortgage, you pay both the loan capital and interest each month. Over time, this gradually reduces your loan balance until the entire loan is fully repaid by the end of the term.
Monthly Payment Comparisons
- Interest-only mortgages generally have lower monthly payments than repayment mortgages of the same size.
- Repayment mortgages have higher monthly payments because you are paying off both principal and interest.
Interest and Risk Differences
- Interest-only mortgages result in paying more interest overall, as the loan balance remains unchanged during the term.
- Repayment mortgages lead to less total interest paid since the loan balance decreases each month.
- Interest-only loans carry a higher risk of negative equity because the original loan balance is not reduced, leaving you more exposed to falling house prices.
- Repayment mortgages have a lower risk of negative equity due to steady debt reduction and building equity in the property.
"At the end of the mortgage term, you’ll still owe the full amount borrowed and will need to repay it in one lump sum."
"You’ll pay more interest overall because the loan balance doesn’t reduce during the term."
"Lower risk of negative equity, since you reduce your debt over time and build equity in your property."
Author's summary: Interest-only mortgages offer lower monthly payments but come with higher overall interest and greater risks compared to repayment mortgages that steadily reduce your loan and build property equity.