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Repayment options

This content applies to Scotland only.

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When choosing a mortgage, you must first decide between a repayment mortgage and an interest only mortgage. Then you can go on to check the interest deals and other options. This page explains what your repayment options might be.

Choosing a repayment option

The features and benefits of mortgages may vary, but whichever repayment method you choose, over time you will have to repay the capital sum (the amount you borrowed) plus the interest on the loan. The two ways of repaying the loan are repayment mortgages and interest only mortgages.

Repayment mortgages

If you have a repayment mortgage, each month you pay back some of the capital as well as interest on the sum still outstanding. In the early years you pay more interest than capital, but provided you keep up your payments, you are guaranteed to pay your mortgage off at the end of the mortgage term.

Interest only mortgages

With an interest only mortgage, you take out a loan to buy your home but only pay back the interest to the lender; you don't repay any of the capital until the end of the mortgage term. Instead, you pay regularly into a long term savings plan. There are three main types:

An ISA mortgage: where the savings plan is an Individual Savings Account. This has tax advantages for most people and it is now the most common type of interest only mortgage plan.
An endowment mortgage: a combination of life insurance and a savings policy. These used to be popular, but they have higher setting-up charges and less flexibility than ISA mortgages, and now have little to recommend them.
A pension scheme mortgage: with these you use part of your pension fund to pay off the loan. This type is mainly suited to self-employed people and higher rate taxpayers.

Costs and risks

Over the whole lifetime of your mortgage, there probably won't be much difference in cost between a repayment mortgage and an interest only mortgage, if you also include the sum you pay into the long term savings plan. If you choose an interest only mortgage, there is a risk that the money you have paid into your ISA, endowment or pension scheme will not be enough to pay off the capital you borrowed.

Many borrowers who took out endowment mortgages are now finding that there is a shortfall between the amount in their endowment and the capital that they owe. If you have an endowment shortfall you should seek expert advice as you may be entitled to compensation. Endowment mortgages are now less common, but remember that only a repayment mortgage guarantees that your monthly payments will cover your loan.