There are many different types of mortgages available with a wide range of options, which can make it difficult to assess which type of mortgage is right for you.
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Despite all the different types of schemes and deals available, there are still just two basic ways of repaying your mortgage available:
This type of repayment method is also known as a Capital & Interest mortgage. Your monthly repayments pay off the interest and some of the capital borrowed each month. This is the only method that ensures your mortgage is totally paid off by the end of the term, as long as you keep up your payments.
This is where you only repay the interest on your mortgage each month, so you’ll need some sort of investment plan to pay off the capital, e.g. a pension, an endowment policy, an ISA or other long term investment plan. When your investment matures, you cash in the plan and use it to pay off your mortgage loan. You are responsible for the repayment of the capital when the mortgage reaches the end of the term, and you may want to seek professional advice on the investment.
An endowment mortgage is the most common type of interest only mortgage. By taking out an endowment policy, you benefit from life assurance cover and a fixed payment for investment. The fixed payments are based on the amount of the loan, as well as the mortgage term and are designed so that, at maturity, the amount invested and earnings are sufficient to pay off the interest only mortgage. Note there is no guarantee that when the endowment policy matures and ‘pays out’, the balance will be sufficient to repay the mortgage.
The Individual Savings Account (ISA), is a tax free method of saving to pay off an interest only mortgage. Using an ISA as a repayment vehicle is growing in popularity, but due to the ISAs complexity it is only for the financially sophisticated, or borrowers taking advice from a suitably qualified financial adviser.
There is no guarantee the ISA will grow sufficiently to repay your loan by the end of its term.
By using a Pension plan as your repayment vehicle for your interest only mortgage, life assurance cover is provided and monthly payments are made into a pension fund. When the pension benefits are eventually taken, the mortgage is repaid using the tax-free lump-sum and the remainder of the fund is used to buy a monthly pension.