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• A to Z of Mortgages

There are two main ways you can repay your mortgage,  either via a :
repayment mortgage, or
an interest only mortgage

Repayment
This involves paying back the capital and interest of your mortgage on a monthly basis. Although this will be more expensive than an interest-only mortgage, you have the peace of mind of knowing that at the end of the term, you will have repaid the mortgage in full.

Repayment mortgages provide certainty of capital repayment and are not dependant on the investment returns of a savings scheme.

Interest only
This means you pay off only the interest on your mortgage each month and nothing towards the original lump sum, or ‘capital,’ that you owe.

This has the advantage of keeping costs to a minimum, because you are only having to pay the interest and none of the capital each month.

But you will need to set up a savings plan, such as an ISA, the proceeds of which can be used to pay off the mortgage at the end of the mortgage term.

When house prices are high, an interest-only mortgage may be the only affordable option for some buyers, but this should not be an excuse to ignore the need to put in place a saving scheme to run alongside the mortgage.

You are taking a risk with an interest-only mortgage. While your savings plan might perform well and you could end up with some cash left over once you have paid off the mortgage, the scheme could just as easily fall short, leaving you with an outstanding debt and no way of paying it off  (unless you sell the property and trade down).

ISAs are a good way to save as the proceeds are largely tax free, but you should take advice on choosing suitable shares or mutual funds to invest in and keep the fund under regular review to ensure it is on track to pay off the mortgage. It is up to you, not your lender, to make sure you maintain payments and review your policy regularly.

Some homeowners who were encouraged to pay off their mortgages by saving via with profit endowment policies in the 1980s and 1990s experienced disappointing returns and significant shortfalls.

Some people choose not to save, saying that they will pay off their mortgage by selling their home. This is fine providing house prices don’t plummet and you are prepared to move house when the mortgage term ends.