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.
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 some people, interest only mortgages are called ‘endowment mortgages’ or even ‘pension mortgages’, or ‘ISA 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?
Interest only mortgages are a type of mortgage where only the interest is repaid. The full capital amount remains outstanding during the mortgage term and is repaid in one lump sum at the end of the term.
Lenders require evidence that a customer will have in place a clear credible repayment strategy and that the repayment strategy has the potential to repay the capital borrowed.
Repayment strategies may include deposits or investment product(s), pension(s), periodic repayment of capital from irregular sources of income (i.e. bonuses), the sale of another property or other land or other acceptable methods which meet lending criteria.
This means that the mortgage payments each month will be lower than those of a repayment mortgage for a similar loan and term. Where the repayment of capital is an investment the investment runs alongside the mortgage but is separate from it; the cost should be taken into account when calculating the overall costs of the mortgage arrangement.
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. The monthly interest payments may vary dependent on whether the interest rate is fixed or variable. 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.
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 comfortable with this risk, then a repayment mortgage is likely to be a better choice for you.
A mortgage is a loan secured against your home or property.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
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