There remains two main methods of repaying a mortgage loan, and it is possible to set up the loan on a ‘part and part’ basis. A description of these methods is provided below.
Repayment mortgages Under a repayment mortgage your monthly repayments consist of both interest and capital, hence, over time the amount of money you actually owe will decrease. In the early years your repayments will be mainly interest and therefore the capital outstanding will reduce slowly in the early years.Whilst this method ensures that the loan is repaid at the end of the term, it is generally more expensive at the start.
Interest only mortgages - As their name suggests, with an interest only mortgage you only repay the interest on the loan. At the end of the term the capital is still outstanding. Therefore you will usually need to take out some kind of investment policy to save up enough to repay the loan at the end of the term.
Traditionally the preferred product for repaying the capital of an interest only mortgage was a mortgage endowment policy (which included a set amount of life cover) – although more recently customers are using ISA’s and pensions to build up a sufficient sum and taking advantage of the tax breaks offered by these products.
The FSA do not regulate some forms of mortgages.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE