Repayment Options
How you repay your mortgage depends on your individual circumstances and how long you will own the property you're buying. Essentially there are 2 ways to repay the money you have borrowed:
1) Repayment Mortgage 2) Interest Only Mortgage
1. Repayment Mortgage
This is the simplest type of mortgage. The payments you make to the lender every month pay off both the capital and the interest from the loan. Provided you keep up the payments, you are guaranteed to pay off the loan by the end of the term agreed (usually 25 years, but you can have a longer or shorter term).
The lender calculates your monthly repayments depending on the amount borrowed, how long for, the interest rate and how the rate you have chosen is set.
Will it pay off my mortgage?
For most people this is the most straightforward way to repay a mortgage, since it guarantees that your mortgage will be repaid at the end of the term, assuming you make all the payments as required by your lender in full and on time.
2. Interest Only Mortgage
For many people, interest only mortgages are called 'endowment mortgages' or even 'pension mortgages', but strictly speaking these names describe an interest only mortgage plus the method by which it is repaid. In other words, an endowment mortgage is an interest only loan that is repaid by the proceeds of an endowment policy etc.
How do they work?
An interest only mortgage is where the lender (a bank or building society usually) only charges you interest on the loan you've agreed. You don't pay the capital back until the end of the mortgage. The lender will usually ask you at the outset, to provide an investment plan of one type or another to repay the loan at the end of the term, such as an endowment policy, pension or ISA savings plan, but sometimes they will leave the repayment plan entirely up to you.
Every month, you then pay this interest to the lender for the duration of the loan. The lender calculates your monthly repayments depending upon how the rate you have chosen is set. At the end of the loan period, the lender will expect the initial capital they lend you to be repaid in full by whatever means you have arranged.
Whether an interest only mortgage suits you depends mainly on whether you're comfortable with taking the risk of repaying your mortgage with a savings plan linked to the stoickmarket.
Will it pay off my mortgage?
All interest only loans involve some investment risk in building up a sum of money to repay the loan. Investments used to build up a lump sum do not guarantee to repay your loan at the end of the term. If you are not comfotable with this risk, then a repayment mortgage is likely to be a better choice for you.
Your home may be repossessed if you do not keep up repayments on your mortgage.