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Although the features and benefits of mortgages vary, whichever repayment method you choose you will have to repay the amount you borrowed (the capital sum) and the interest on the loan. There are two basic ways of repaying the loan: a repayment mortgage, and an interest-only mortgage. Repayment mortgages With a repayment mortgage, each month you pay back some of the capital as well as interest on the amount still outstanding. In the early years you pay more interest than capital. Provided you keep up your payments, your mortgage is guaranteed to be paid off at the end of the loan term. The repayment type of mortgage carries least risk. In the past, some financial advisers have steered people away from repayment mortgages because they got more commission on other types of mortgage. Back to top Interest-only mortgages With an interest-only mortgage, you pay interest to the lender, but you don't repay any of the capital until the end of the term. Instead, you pay into a long-term savings plan which should clear your mortgage debt when it matures. There are three main types: - an ISA mortgage where the savings plan is an Individual Savings Account. Like any ISA, this has tax advantages for most people and it is now the most common type of interest-only mortgage plan
- an endowment mortgage - basically 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
Back to top Costs and risks There probably won't be much difference in cost between a repayment mortgage and an interest-only mortgage over the life of the mortgage. However, interest-only mortgages are more risky than repayment ones because there is no guarantee that the proceeds from the endowment, ISA or other policy will cover the whole sum you borrowed in the first place. Endowment mortgages are now less common, but remember that only a repayment mortgage guarantees that your monthly payments will cover your loan. Many borrowers are now finding that their endowment policy will not cover their loan and are being advised to top-up their cover by for example increasing their monthly payments. Get expert advice if you are in this situation as you may be entitled to compensation . Back to top Interest options Whichever basic type of mortgage you choose you'll also have a choice of interest deals . Back to top Cashback mortgages Some lenders offer cashback deals where you get a percentage of the loan as a cheque to spend on your move or whatever you choose. You may decide not to go for this unless you really need the money, as the deal may tie you to the standard rate of interest for a number of years. Back to top 'Flexible' mortgages A flexible mortgage gives you more freedom to repay at the speed you choose. You may be able to increase or decrease your monthly payments, building up credit you can draw on, or taking a payment holiday where you pay nothing for a few months. However, you're unlikely to get this flexibility and a very cheap interest rate. Back to top Current account mortgages A current account (or all-in-one) mortgage combines a flexible mortgage with a current account in one package. Money in your current (or savings) account can be set against the amount you owe on your mortgage or other borrowing, so that your interest payments are reduced. Back to top
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