Repayment Methods

Repayment Mortgages

With a repayment mortgage, monthly payments consist of the interest and part of the capital borrowed. In the early years payments are made up of mainly interest, the capital will not reduce dramatically. The advantage of a repayment mortgage, you are guaranteed, that at the end of the term your mortgage will be repaid.

You are able should you wish, to increase your normal payments this will go towards reducing the mortgage term.

A mortgage protection policy would cover the amount of the loan and will guarantee to repay the balance outstanding of the mortgage in the event of the borrower's death.

Interest Only Mortgages

With interest-only mortgage you'll only repay the interest on the loan to your lender each month. The mortgage balance will not reduce. The Mortgage will be repaid courtesy of a separate repayment vehicle such as an ISA, Endowment or Pension plan that will provide you with a lump sum at the end of their designated term, generally to tie in with the end of your mortgage.

The advantage of an interest-only mortgage is, if your investment exceeds expectations you could end up repaying your mortgage early or a cash bonus at the end of your term.

Disadvantages are, if your investment plan doesn't perform as expected you could end up with a shortfall and still owe money on your property. Repayment vehicles need to be reviewed on a regular basis to ensure full mortgage repayment.

If you decide this type of mortgage suits you best, you need to look closely at the different types of repayment products on offer.

Hybrid or Part and Part Mortgage

This type of mortgage is a combination of both Repayment and Interest only.

An example why you might decide on this type of mortgage could be, you may have an endowment from a previous mortgage that did not perform as well as expected. You now require additional guarantees that your mortgage is repaid at the end of the term

Combining the two types of mortgages in this way reduces the disadvantages of each product. You also decide on how the amounts of the mortgage are split.