What is interest and why’s it so important?
When you borrow an amount of money as a loan, you agree to pay it back. You agree to how much you’re going to borrow, and how long for. When people take out a loan, it is typical that they will pay interest on the amount of money they borrowed. The amount of money borrowed is typically referred to as ‘the capital’.
Interest is a fee you pay on the capital you borrow. It is a monthly percentage of the money you are borrowing. At the start of your mortgage, most of your monthly payments will be interest. As you continue to pay if off, your monthly payments will cover the capital more, and less interest.
When people talk about mortgages, they are typically referring to repayment mortgages. This is where you borrow the capital, and pay interest on the remaining capital until the capital is paid off. When you have finished paying off your capital, you will own your home. These mortgages are great if you are planning on settling down, and want to eventually own your own home. As this is the aim of most people who take out mortgages, these are by far the most popular type of mortgage.
An interest-only mortgage is when you only pay interest on the capital you borrow. This means lower monthly payments as you are not paying off the capital. However, when your mortgage term is up, you will still owe the full sum of the capital. The most common way of paying this back is through the sale of the property. If this is your repayment strategy, you are at risk if property prices fall by the time you come to sell.
This is called negative equity, where you have borrowed more than the property is worth, leaving you to find the rest of the sum you borrowed. As you can see, interest-only mortgages pose a greater risk to the lender and borrower. This makes being approved for one more difficult than a repayment mortgage. You will have to have a solid repayment strategy in place to be approved.
So which one should I choose?
Just with many of the questions you might have found on this blog, it depends on your personal circumstances. There are some suggestions we can make however. If you are looking to settle down and own your own property, with less risk, repayment mortgages are the right idea. If you are looking to live in a property with the possibility of packing up and moving some day, interest only might be a suggestion.
Can I talk to someone about them?
If you have questions about which would be the right choice for you, you’re in the right place. Our team of mortgage experts are on hand to answer any questions you might have about mortgages. They’re available for online live chats, and phone calls during these hours:
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We built Habito around the customer, and understand people want to speak to a qualified human being. Our team are a friendly bunch, so what’s the wait? Get speaking to an expert today to see if we can help you find mortgage bliss.