Once your mortgage lender has given you an agreement in principle (AIP) also known as Decision in principle (DIP), you may have the flexibility to choose your repayment method, opting for either a "repayment" or "interest-only" basis.
Repayment Mortgage
A repayment mortgage is where your monthly payments to the lender will cover some of the capital amount that you’ve borrowed, as well as some of the interest on the loan.
The aim is to pay back the original loan amount plus interest over the term agreed when you take out the mortgage. As the term continues, the amount outstanding on the loan reduces so the full amount of the loan will have been repaid in full at the end of the term. This allows you to build equity over time and eventually own your home outright, as long as you have made all your payments on time.
Interest-Only Mortgage
Under an interest-only mortgage, your payments solely cover the interest on the loan. The total loan amount (the capital) remains unchanged over time, and you are responsible for repaying the entire loan balance to the lender at the end of the term. Therefore, it's imperative to ensure you have the necessary funds available for repayment.
To prepare for making the final payment on your interest-only mortgage, you might opt to invest, aiming to accumulate enough capital to repay the loan at the end of the term. Investing offers the potential for growth. Additionally, when you move or remortgage, you can typically transfer your investment to the new mortgage.
However, it's important to note that there's no guarantee your chosen investment will grow enough to cover the loan repayment. Nevertheless, you can usually increase your investment contributions over time if it appears necessary to meet the repayment obligation. This would be the perfect time to speak to one of our advisers at Chrysalis Wealth Management!
