How to Repay Your Mortgage. Advantages and Disadvantages.
There are two ways to repay the amount you have borrowed (the ‘capital’). Both of them have advantages and disadvantages. Be aware of them before buying a mortgage. First method is called repayment mortgage (also called a capital-and interest loan). Your monthly payments gradually pay off the amount you owe as well as paying the interest charged on the loan. Provided you make all the agreed payments, the loan will be fully paid off by the end of the mortgage term. In case of re mortgaging you will usually have paid off some of the ‘capital’ and so will need to pay back less than you borrowed. The repayment is more flexible in this way. Besides if you run into problems keeping up your monthly repayments, you could ask your lender to extend the term or accept interest-only payments for a while. This reduces the amount you pay each month in the short term but increases the total cost of the loan. Your lender might agree to stop your payments for a while.
The second method is called interest-only mortgage. Your monthly payments cover only the interest on the loan. They do not pay off any of the capital. You will need to arrange to pay separately into a savings or investment scheme to build up a lump sum to pay off the mortgage at the end of the term. You have to make sure you have enough money to repay the mortgage at the end of the term. Otherwise you could lose your home. In this aspect the second type of repayment may be more risky. You need to have some other arrangement for repaying the loan. You will need to make monthly payments to a savings or investment plan to build up a lump sum. You are then taking the risk of repaying your mortgage with a savings plan which is linked to the stock market. Besides if you run into problems your lender may reduce or stop your payments, but you will not necessarily be able to reduce the amount you pay each month into a savings scheme. If you are not comfortable with these risks, a repayment mortgage is likely to be a better choice.
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