Capital repayment mortgage vs interest only mortgage?

hi Serena1
The short answer is that the more you overpay the sooner the mortgage will be repaid and the more interest you will save - Check with your lender that it is a flexible mortgage where you can underpay if you have previously overpaid.

As the old saying goes "courses for horses" and there is no one single answer for everyone because each "ideal response" will be tailored to one's own circumstances.I guess you can say that the interest only mortgage suits you more than others but the one best and complete solution would be to pay off house via cash payment because cash is king. Unfortunately, this is beyond the reach of most of us for one single property. Personally, I would prefer to rent and save until I can pay for house with cash.

Just to add to previous answers, if your life cover provides cover for your death only, then you will need to over pay, as you are doing, and the only difference between that and a standard capital-and-interest mortgage is that you have the flexibility to pay as you can, rather than pay a regimented additional sum with every payment. Quite important if you are self-employed.

However if the life cover you have pays a lump sum out at age 60/65 (with profits or otherwise) then that will be another way of paying off the mortgage, or at least part of it. Mortgages attached to life policies were very popular once, until they became unreliable in terms of producing enough profits to pay off the mortgage in full.

I think you've probably got the best option. You might think about getting a set-off mortgage, which allows your current account balances to be offset against your montgage for the purposes of calculating interest. That would mean your mortgage would be paid a lot quicker, so long as you keep paying the same amount as you do now.

Also you might also check to see if you can re-draw the extra payments you make from time to time. Then, if your financial fortunes fade a bit from time to time you can claw a bit back, to avoid otherwise expensive overdraft rates.

One final point, if you're paying for Mortgage Protection Insurance, consider cancelling it. The benefits, especially for a self employed person, rarely match your expectations, and the money you are paying in premiums could also be used to help repay your mortgage.

Following Wojtek's comments as below, I would ill advise you cancelling payment protection insurance with the fragile employment market as it is. A self employed person can claim on this type of policy as much as an employed person - the only difference is that the buisness must be wound up for you to claim. Also being self employed, you will not have a benefit of sick pay such as an employed person has, so the accident and sickness element of the polcy will be invaluable, as benefit can be paid from 30 days from the claim start.

Interest only is suitable in certain curcumstances, but the default suggestion is capital repayment as it will guarantee to repay the loan at the end of the term providing you keep your payments up to date. The risk with an interest only mortgage is that you will not have the capital at the end of the term to repay the outstanding debt. Also, pound for pound, interest is more on an interest only mortgage because the interest charged is on the outstanding balance which doesn't decrease.

I don't think there is a clear cut to your question here Serena as your mortgage is not being repaid in the most efficient manner as you do not have a dedicated level of payment to the capital every month and possibly some months, nothing at all. If your lender allows a certain level of capital payment on a flexible basis as you describe, then that is a good start. With current low levels of mortgage interest, you plan is as good as you can get but any rise in mortgage interest rates may well stop you affording capital repayments. Ideally you should be creating an additional vehicle for repayment such as dedicated high interest savings, using up your ISA allowance where you can. But I sense that the budget may well not allow that. My only other comment is that 25 years of interest only is the most expensive option. A capital repayment mortgage is the obvious choice but you need confidence in your self-employed earnings to agree to that.