Mortgage Repayment Types

A mortgage is a loan you take out to buy property. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. If you change lenders but don’t move home it’s referred to as a ‘re-mortgage’ when you look to re-arrange your current borrowing.

The two main ways to repay your mortgage are ‘repayment’ and ‘interest only’.

With a repayment mortgage you make monthly repayments for an agreed period (the ‘term’) until you’ve paid back the loan and the interest.

The facts:

• Each monthly repayment to the lender consists of an element of capital and interest.
• Gradually your loan reduces, building up equity in your home.
• At the end of the term your mortgage will be repaid, providing you keep up your monthly repayments.
• Suitable for people who would like to guarantee the repayment of their mortgage.
• A low risk method of repaying your mortgage.

With an interest only mortgage you make monthly repayments for an agreed period but these will only cover the interest on your loan (endowment mortgages work in this way). Normally, you’ll also have to pay into another savings or investment plan that’ll hopefully pay off the loan at the end of the term or possibly look to sell the property and clear any borrowing at that time.

The facts:

• Each monthly repayment to the lender consists of interest only.
• As no capital repayments are made during the term of this mortgage, monthly costs are lower, however you will not increase the equity in your home.
• Suitable for people who do not wish to repay the capital until the end of the mortgage term. It is your responsibility to ensure an adequate repayment method is in place to repay the mortgage at the end of the term.
• Repayment of the loan is self-managed by you and would usually be paid from proceeds of the sale of your home, inheritance, savings or investments.
• This type of mortgage is not accepted by all lenders unless an investment vehicle is also selected.

Your home may be repossessed if you do not keep up repayments on your mortgage.