Interest-only mortgage
This is a mortgage where only the interest is repaid each month. At the end of the term you have to find cash to repay the capital you borrowed.
You could do this by selling your property, with an inheritance or with the proceeds of an investment vehicle. The choice is yours but you must make sure that you have something in place to clear your debt.
If you opt for an interest-only mortgage you will probably choose one of the following investment vehicles:
ISAs – individual savings accounts (ISAs) offer you the chance to earn money on your investment without paying income tax or facing a capital gains tax (CGT) bill when you withdraw your cash.
There are three different types of ISA: cash, equity and insurance. To earn enough to repay your mortgage you will probably need to invest in some sort of equity ISA, which means having some exposure to the stock market.
There are no guarantees that your investment will grow enough to cover the capital you need to repay.
There are many different equity ISAs to choose from offering different levels of risk and access to different investment styles.
A small number of lenders offer ISA mortgages where the loan is packaged with a choice of ISAs, however most borrowers will probably prefer to choose their own ISA from the whole of the market.
Pensions – you can back an interest-only loan with a personal pension. At the end of your mortgage term you withdraw a tax-free lump sum from your pension pot to pay off your mortgage debt.
You must be aged 50 or over at this time and you can only take out up to a quarter of the fund.
Like other investments, the pension may not grow enough to enable you to pay off the capital you owe.
Also you must bear in mind that taking money out of your fund will reduce the amount you have to spend on an annuity and therefore the annual income you receive from your pension.
Endowments – these have fallen out of favour in recent years as the returns have failed to live up to expectations and many borrowers have discovered a gap between how much their endowment stands to be worth and the sum they owe their lender.
As a result, you are unlikely to be recommended an endowment mortgage.
If you already have one and youre concerned your policy wont make enough to pay off your mortgage, you can increase your payments, pay off some of your mortgage as a lump sum or through regular payments, start up another investment such as an ISA, or do a combination of these.
Repayment mortgages
Each month you pay back some of the capital you borrowed to buy your home and some of the interest.
In the early years the majority of your monthly repayments go towards paying off the interest but in later years they reduce the capital you owe. By the end of your chosen mortgage term you will have cleared the loan.
Repayment term – when you arrange your mortgage you will agree a repayment term with the lender. This is usually 25 years, but can be more or less.
Your monthly repayments will be worked out based on your chosen repayment term the longer the term the lower the repayments. If you decide you can afford to repay more each month you may be able to repay your loan early.
Flexible mortgages allow you to adapt your monthly payments to suit your lifestyle. Depending on the scheme, you may be able to make regular or lump-sum overpayments whenever you like, without incurring any early redemption penalty.
Some deals also let you make underpayments or take payment holidays, although usually only once youve built up a reserve of overpayments.
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