First Time Buyer: Interest Only or Repayment Mortgage?

Mortgage Quote Line

0845 108 0505

• Mortgages
• Credit Cards
• Loans
• Investments
• Life Insurance
• Home Insurance
• Insurance

First Time Buyer: Interest Only or Repayment Mortgage?

As a first-time buyer, it can be difficult to know whether to choose an interest-only remortgage (and henceforth have lower monthly repayments when you need them most) or a repayment mortgage (and make a dent in the capital owing on the property but potentially leave yourself short on cash).

For first-time buyers in the current mortgage market, this decision is particularly important.

What is an interest-only mortgage?

Many first-time buyers choose an interest-only mortgage as a way of keeping monthly repayments low. Interest only mortgages can be a good way to help first-time buyers get onto the housing ladder and meet repayments. Interest-only mortgages are also a popular choice for buy-to-let investors.

Interest-only mortgages are a method of repayment whereby the first-time buyer (or other borrower) elects to only pay the interest on the money lent. This means that the borrower does not pay off any of the capital, and if they have not switched to a repayment mortgage will owe any money outstanding at the end of the mortgage term. This gives the potential to be caught out financially at the end of a mortgage loan, if no repayment vehicle is in place.

Interest only remortgages significantly reduce the size of monthly mortgage repayments, and can be a good choice for first-time buyers. Many first-time buyers choose interest-only mortgages for a couple of years and then switch to a repayment mortgage when they can afford it.

Interest-only mortgages are much more common than they once were, and it is normal to switch from interest-only to repayment. Minimising monthly mortgage payments can be a major bonus of an interest-only mortgage, but remember that you are not touching the capital with your monthly repayments.

What is a repayment mortgage?

For first-time buyers, repayment mortgages can be daunting simply because of the size of the repayments. Repayment mortgages, also known as Capital Mortgages or Capital Repayment Mortgages, are a standard way of making mortgage repayments. At the end of the loan period, a repayment mortgage will ensure that the borrower has paid off the mortgage in full and owns the property outright.

When a first-time buyer takes out a mortgage loan, their borrowing amount may be divided into capital repayments and interest repayments. Capital repayments are payments on the amount borrowed, whilst interest repayments merely service the interest of the loan. The way in which repayment mortgages work, for first-time buyers and all borrowers, are that in the early stages of your mortgage you pay off interest predominately. As the capital is paid off, the borrower pays less interest and more capital.

Capital repayment mortgages always cost more than interest-only mortgages, but they do mean that the borrower owns their property outright at the end of the term.