• How does a Repayment Mortgage work?
• How does a Interest Only Mortgage work?

How does a Repayment Mortgage work?

Monthly payments are made up of interest charged on the amount borrowed and a portion of the capital to repay the mortgage. During the early years most of each month's payments are interest and it is only later on that you start to repay any significant element of capital.

Advantages

• The mortgage is guaranteed to be repaid at the end of the term providing that payments are maintained. You can see the mortgage reducing each year (albeit very slowly in the early years).

Disadvantages

• It does not contain any form of savings, so there is no possibility of additional return or early repayment. However, the mortgage could be repaid early if payments are increased.
• You may need to take out separate life cover to ensure the mortgage can be repaid if you die. You should consider the benefits of protecting your income, should you become ill and be unable to work.

How does an Interest Only Mortgage work?

Monthly payments to the lender consist of interest only and the outstanding mortgage remains the same. You make payments to a separate investment with the aim of producing enough capital to repay the mortgage in full at the end of the term. There are a number of different investments that can be used. You can also use a combination of them.

Your home may be repossessed if you do not keep up repayments on your mortgage.