Morgage Repayment Methods: Choose The Right One For You

2007-03-08 10:33:40

( Financial )



When you take out a mortgage, you also have to choose the morgage repayment method that you like to avail and can afford to pay. A morgage repayment scheme would depend upon the age of property, your income and the length of repayment period. You can normally select from these two repayment methods: repayment mortgages and interest only mortgages.

Repayment Mortgages

Repayment mortgages are mortgages whereby you repay the loan in equal monthly installments along with the interest so that at the end of the term (which is usually at least 25 years) the mortgage is cleared. You may find repayment mortgages easy to understand. However, it may not be easy for you to meet your monthly morgage repayments during the early years of the loan since most of your payment will be applied to the interests. You may want to use a mortgage repayment calculator before you decide on choosing repayment mortgages.

Interest Only Mortgages

In interest only loans, your monthly morgage repayments to the lender will cover only the interest on the loan. The capital and the interest will be paid back by the end of the loan term. To do this, you have to invest additional money each month into an individual savings account, endowment policy, pension or other savings fund with the expectation that the savings will grow enough to repay the loan. However, if your investment performs badly, you could face a shortfall at the end of the period.

If you're expecting an increase in your income soon, you can find lenders that allow you to initially get an interest only mortgage and then change it to a repayment mortgage. In any case, it is best to consult an independent financial adviser who can help make up your mind on what morgage repayment method you should choose.


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