A GUIDE TO REPAYING A MORTGAGE

There are two basic methods of repaying a mortgage - repayment or interest-only.

Repayment: guarantees the loan is paid off in full at the end of the agreed term, but you will need to arrange separate life cover. Click here

Interest-Only: You pay interest only to the lender throughout the loan and pay back none of the outstanding debt until the end of the term.

As well as your monthly payment into a separate investment or savings plan (endowment policy, personal pension or ISA), the proceeds of which are designed to pay off your loan. The value of the investment may be greater than the outstanding loan leaving a surplus lump sum However, you must remember that you could face a shortfall. Click here

Repayment

With a repayment-type mortgage, the amount you pay to your lender every month consists of interest owed on your loan, plus repayment of some of the capital itself. This makes for monthly payments that are slightly higher than with an interest-only loan. But it does bring the peace of mind of knowing that you are reducing your debt every month. And you are guaranteed to have paid off your debt by the end of the mortgage term. You will have to arrange your own life insurance with a repayment mortgage, in case you should die before the mortgage is paid off.

In today's cautious times, more and more new borrowers are taking out repayment-type mortgages.

Pros

Guaranteed to pay off your debt

Security of knowing debt is reducing monthly

Cons

More expensive than an interest-only loan

Have to arrange your own life insurance

Interest-only

With an interest-only mortgage, your monthly repayments are made up of three parts: interest on the capital you owe your lender; life insurance; and a contribution to an investment plan designed to pay off the outstanding capital at the end of the mortgage term.
An interest-only mortgage will generally work out slightly cheaper per month than a repayment mortgage, but is inherently more risky - there is no guarantee that the investment plan you choose will generate enough capital to pay off the outstanding debt at the end of the mortgage term.

You'll have to rely on your investment provider informing you that your fund isn't doing well, and you'll have to bump up your contributions accordingly. On the other hand, if your investment is very successful, you may be able to pay off your debt and have a lump sum left over, or even clear the debt years in advance of the expected date. But don't count on it.

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