Weighing up your options

When it comes to paying off your mortgage there are two main options: capital repayment and interest-only.

If you choose to pay back your mortgage using a capital and repayment method you will be paying back the interest that you owe as well as some of the capital. At the end of the mortgage term you will have paid off the mortgage in full with no lump sum to owe.

With an interest-only mortgage your monthly payment covers only the interest that you owe on that debt. The idea is that you have to have some form of repayment vehicle, such as an ISA, running alongside your mortgage so that when the term ends you have built up enough money to repay the original loan.

If you choose to go interest-only your monthly mortgage payment is lower because you are not repaying capital. In theory, this shouldn’t actually be much cheaper on a monthly basis because you’ll also be putting some money aside in an investment. However, many people have viewed interest-only mortgages as a cheaper option and have no repayment plan in place. With many lenders facing rising levels of bad debt, they’re taking a tougher stance on interest-only loans.

To encourage people to opt for repayment loans, some lenders are charging a higher rate to those who go interest-only and have also tightened their criteria. Some require proof that you have a repayment plan in place, while others will only consider lending on an interest-only basis to those with a significant amount of equity in their home.

If you have an interest-only mortgage and are satisfied that you have a reliable repayment plan in place, you need to regularly check to ensure that over the mortgage term you are on track to accruing a sufficient amount to cover the mortgage. If however, you went interest-only to keep your mortgage costs down and have made no provision to repay the capital, consider if it is time to switch to a repayment loan.