Contractor mortgages are available in two types of monthly repayment, and the repayment method that you choose will depend on your own individual circumstances. At The Contractor Mortgage Company, we specialise in contractor mortgages, so we know where to find you the best deals on your contractor mortgage on whatever repayment method you wish.
The two types of repayment methods are repayment basis, also known as capital and interest, and interest only basis.
Repayment mortgages are also known as capital and interest because every month, your payment will go towards the capital and the interest of the loan. For example, if you take a £100,000 contractor mortgage over 25 years at 5.5% the interest would be £84,226.25. On a repayment basis, you would be repaying the capital and some of the interest over the term, so that by the end of the mortgage term you will have repaid the entire loan amount plus any interest, meaning you will fully own the property.
Interest only contractor mortgages are exactly as they sound. You are only repaying the interest and the capital on the loan amount is not being repaid. So in the same example, if you took a £100,000 contractor mortgage over 25 years at 5.5% the interest would again be £84,226.25. On an interest only basis, you would only repay the interest so at the end of the term, you would still owe £100,000 to the bank. You can choose to repay this, or sell the property. If you wish to remain in the property, you can remortgage at the end of the term.
Many people choose the interest only option if the mortgaged property is an investment property, as even if you sell the property and repay the loan to the bank at the end of the term, you are still likely to receive money back as the property value may have increased.
If your contractor mortgage is on an interest only repayment basis, you are able to switch to a repayment basis at any time in order to start paying the capital back. Your contractor mortgage lender may allow you to do this under the terms of your mortgage contract, but if this is not an option you can simply remortgage and opt for a repayment basis on the new mortgage.
This really is a personal choice and you need to take the time to consider what you want from the property. If it is to be a home and you want to fully own it at the end of the mortgage term, then a repayment basis is for you. If you are looking for an investment, for example a buy to let property, and you only want to take the growth then an interest only contractor mortgage may be better for you.
Of course, interest only contractor mortgages will offer lower monthly repayments because you are only paying back the interest, so some first time buyers take this option to begin with to help their cash flow in the short term and then switch to repayment later.
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