Repayment Methods

Repayment Mortgage
This type of mortgage is also known as capital and interest mortgage. Monthly payments are made up of interest charged on the amount borrowed and a portion of the capital to repay the mortgage. During the early years, most of each month's payment is predominately interest and it is only later on that you start to repay any significant element of capital. A low risk method of repaying the mortgage, ideal for those who want the guarantee that their mortgage will be paid of at the term end.

Advantages:

• The mortgage will be repaid at the end of the term.
• You can see the mortgage balance reducing.

Disadvantages:

• Does not contain any form of saving
• Does not contain any life cover

Interest Only Mortgage

Monthly payments to the lender consist of interest only and the outstanding loan remains the same. The mortgage will come payable at the end of the term. You can make payments to a separate investment with the aim of producing enough capital to repay the mortgage in full at the end of the term. There are a number of different investments that can be used. You can also use a combination of them. Not every investment vehicle is accepted by lenders, those commonly used are ISA, Endowment or Pension.
Advantages:

• Investment vehicle may have built in life cover ( Endowment)
• Variety of investment vehicles and funds..

Disadvantages:

• Repayment of the mortgage entirely dependant on the performance of the investment vehicle.
• Payments to the investment vehicle may need to be increased if returns are low

Part and Part
You can combine the two repayment methods, this is commonly used with people moving home who have existing investment vehicles but want a guarantee that some of the mortgage is repaid. Not all lenders will accept a combination of the two methods.