Repayment mortgage

This method of repayment involves paying back an element of the capital borrowed each month along with the interest payment to the lender. Whilst the majority of the monthly payment in the early stages is made up of interest with only a small amount of capital repaid, the balance will shift over time as the mortgage debt gradually reduces.

This is considered to be the only way to guarantee the mortgage debt is repaid because, providing all monthly payments are paid on time and in full, the amount owing will be nil at the end of the specified term.

Interest only mortgages

With an interest only mortgage, your monthly payment to the lender will only cover the interest charged on the loan. The capital will remain unpaid but will instead have to be repaid in full at the end of the specified term.

It is your responsibility to ensure the debt is repaid at the end of the term.  A way in which this could be done is by investing additional funds. A variety of investment vehicles can be used for this purpose, some of which have tax advantages for the investor. In the recent past they have included endowments, the tax free cash from personal pensions, PEP’s and, more recently, ISA’s.

However, unlike Repayment mortgages, there is no guarantee that your mortgage will be repaid at the end of your selected term as your chosen investment vehicle may not grow sufficiently. Recent concerns over potential endowment shortfalls has highlighted the risk involved in relying on investments over a specified time frame and, whilst the opportunity is there to top up such investments if required, you may not be in a position to do so.