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Repayment and interest only mortgage calculator

The following mortgage calculator provides a mortgage calculation based on a repayment mortgage and interest only mortgage.

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Differences between a repayment and interest only mortgage

With the interest only mortgage none of the initial capital you borrow is paid off. In order to pay off the initial capital that you borrow with an interest only mortgage, you must ALSO pay into an investment vehicle such as an endowment policy or an ISA. The results for the interest only mortgage only shows the interest you pay and does not include payments made into a separate investment vehicle.

With an interest only mortgage the total interest you pay over the term of the mortgage is substantially more than with a repayment mortgage. This is because you are not paying anything off the initial capital you borrow with an interest only mortgage. The interest you pay every month remains the same and does not go down with time. With an interest only mortgage the money you pay into your investment is supposed to pay off the initial capital you borrow.

In contrast with a repayment mortgage, each payment you make reduces the outstanding capital by some amount, and therefore the interest you pay during the term of the repayment mortgage reduces with time. Enabling the Show Repayment Schedule check box in the mortgage calculator will show breakdown of the interest and capital payments over the term of the repayment mortgage.

If you choose an interest only mortgage you want the investment vehicle reach at least the value of the initial capital you borrow plus the extra interest you pay, before or at the end of the term of your mortgage. The following example shows the reasoning more clearly.

An example for comparative purposes

If the initial capital you borrow is €100,000 and the interest rate on your mortgage is 6% over 25 years the monthly payments on a repayment mortgage is €644.30 and the monthly repayments on the interest only mortgage €500.00. The difference between these monthly payments for a repayment and interest only mortgage is €144.30.

The total interest you pay on the repayment mortgage is €93,290.42, whereas the total interest you pay on an interest only mortgage is 150,000. The extra interest paid back on the interest only mortgage is €56,709.58.

If you take out an interest only mortgage and you invest the monthly difference (€144.30) you have saved into an investment vehicle, you would want that investment vehicle to pay off the initial capital you borrowed (€100,000) plus the extra interest you have paid on the interest only mortgage (€56,709.58). In this example, you would want your investment vehicle to be worth €156,709.58 (i.e. €100,000 plus €56,709.58).

If the interest earned on the investment vehicle over the period of the mortgage is the identical to the interest you are paying on the interest only mortgage (i.e. 6% in this example) then you are no worse off, i.e. your investment vehicle will be worth €156,709.58.


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