Should we get a repayment or interest-only mortgage?

Q We are a self-employed couple who are looking at flexible self-certificated mortgages.

We are thinking of saving money in a savings vehicle such as an Isa to repay an interest-only loan at the end of its term. How does this compare to paying off the loan during the term through monthly/annual overpayments (with the support of lighter savings vehicles)?

Would utilising overpayments reduce interest? And how would this compare to a repayment mortgage (assuming all APR's were equal)?

IW

A If you value the benefits of simplicity and security, a repayment mortgage wins every time. Provided you keep up with the monthly mortgage repayments, you are guaranteed to have paid off the mortgage loan - and so own your home outright - by the end of the mortgage term. No such guarantees exist with an interest-only mortgage backed by a savings vehicle, as anyone who faces a shortfall on their endowment-backed interest-only mortgage would tell you.

The appeal of an interest-only loan is - on the face of it - that the monthly mortgage repayments are cheaper than with a repayment mortgage. For example on a £100,000 loan over 25 years with an interest rate of 5%, the monthly interest-only repayments would be about £415. An equivalent repayment mortgage would carry a monthly cost of around £585 - a difference of £170. However, to be certain of saving up enough to pay off the full £100,000 loan in 25 years' time, you would need to save at least £170 (assuming an after-tax return of 4%) or more likely, £200 a month. So the repayment mortgage is actually slightly cheaper - not to mention more certain.

As far as making overpayments goes, yes, overpayments are indeed a good thing because they reduce the overall interest bill. However, overpayments are a possibility with either an interest-only or a repayment mortgage.