With a repayment mortgage you make a payment every month to the mortgage lender which includes both interest on the mortgage and a portion of the capital. Over time the capital decreases in size, thereby reducing the amount of interest payable, so more of your payments can be channelled into paying capital.
The benefit of a repayment mortgage is that you can be sure your debt will be cleared by the end of the term, providing you maintain the repayments throughout. It also gives you a transparent view of your mortgage.
Repayment Mortgage Calculator to find out how much is your mortgage going to cost you?
With an interest only mortgage, your monthly payments only cover the interest due, making no payment towards the capital. You have to arrange a 'repayment vehicle', which is normally an investment, that will provide the necessary funds to repay the capital in full at the end of the mortgage term.
Interest only mortgages can be useful if you are expecting a lump sum payment at the end of the mortgage term. However, most borrowers set up an investment vehicle into which they make regular payments. Your monthly repayments to your lender can be significantly less. However, you may not have enough funds to repay the capital at the end of the mortgage period, as investments can go down as well as up.
Financial advisers don't recommend interest-only mortgages to regular wage earners who take out moderate-size home loans and don't have a strategy for investing the savings.
Use this Interest only Mortgage Payment Calculator to find out how much is your mortgage going to cost you?