In the case of a traditional redeemable mortgage (repayment mortgage), the borrower refunds the interests and a part of the capital at every monthly payment. Thus, payment after payment, the remaining capital due and consequently the interests, decrease.
In the case of an Interest Only (IO) mortgage, the borrower refunds the capital at the end in a single payment. The monthly payments include only the interests, calculated over the total duration of the borrowed capital. Consequently, the cost of an IO mortgage is higher than a traditional repayment mortgage. Nevertheless, combined with a rental investment, the IO mortgage becomes more advantageous because the IO mortgage has lower monthly repayments and they can be easily covered by the rental income. The owner can also deduct the interest from his French income to pay fewer taxes in France.
The two following graphs represent the cash flow refund in the case of a redeemable mortgage and an IO mortgage for an amount of 150.000 euros, over 10 years at the fixed rate of 5%.
Redeemable mortgage (repayment mortgage)
cash flow refund:
Total interests: 49 837 Euros (yellow: Interest; red: capital repayment)
Difference between IO and repayment mortgages
