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Repaying the Capital
There are two basic types of mortgage: repayment and interest only.
Repayment Mortgages
With a repayment mortgage, your monthly payments are set at a level which, provided you make all the payments agreed with the lender, guarantees that the amount you have borrowed will fall throughout the mortgage term and will be fully repaid by the end of the term. Generally in the early years, most of the monthly payment is made up of interest and only a small amount of the loan is repaid.
You may be able to repay your mortgage early by paying additional amounts.
Life assurance if required is arranged separately.
Interest Only Mortgages
With an interest only mortgage, the amount you borrow stays the same throughout the term of the loan.
Usually, you make separate payments each month into a savings scheme to build up a lump sum. The idea is that the lump sum grows sufficiently to repay the loan at the end of the mortgage term. Interest only mortgages can be linked to various types of investments, such as an endowment, ISA or Pension Plan.
There is no guarantee that the savings scheme will provide enough capital to repay the loan, but the amount you save is set assuming your investment grows at a certain growth rate each year.
All interest only loans, backed by a savings scheme, mean you need to accept some investment risk in building up capital. Provided the investment grows sufficiently the loan is repaid, if it grows more there could be a bonus after the mortgage is repaid, if it grows less, the monthly payment may need to be increased.
Interest only loans can also be repaid using lump sum contributions from bonuses or other investment assets, including stocks and shares or the sale of additional properties.
It is your responsibility to ensure that you have sufficient funds to repay the mortgage at the end of the term otherwise you could lose your home.
You can have a mortgage which is a combination of part repayment and part interest only.
Residential Mortgages
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