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Repayment options

Once you've chosen a mortgage you'll then be able to choose how you'd like to repay the sum you're going to borrow.

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:

  • 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.
  • 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.
  • 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 mortgage 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.

Interest options

After you have chosen a repayment or interest only mortgage you will have to consider your options about how your mortgage interest is calculated.

Calculating your repayments

If you know how much money you want to borrow and the interest rate your lender will charge, you can use the Which? Mortgage Guide repayment calculator to work out what your repayments might be.

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The important points

  • Mortgages all have the following in common - you wil pay back the capital sum (the amount borrowed) plus the interest on the loan.
  • The two main types of mortgage you might be offered are repayment and interest only.
  • Interest only mortgages mean you pay the interest on the loan during the length of the mortgage and also pay into a savings plan to let you pay off the capital (amount borrowed initially).

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