Under the repayment method your monthly repayments consist of both interest and capital, so over time, the amount of money you actually owe will decrease. In the early years of your mortgage agreement, your repayments will be mainly interest and therefore the outstanding capital will reduce slowly at first.
This method ensures that the mortgage is repaid at the end of the term providing all payments are made on time and in full.
As a mortgage is secured against your home, it could be repossessed if you do not keep up with the mortgage repayments.
As the name suggests, with the interest only method you only repay the interest on the amount borrowed. At the end of the term the capital is still outstanding. Therefore you will usually need a contingency for repaying the mortgage at the end of the term. It is very important to get advice on this type of method.
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 Individual Savings Accounts (ISAs) and pensions to build up a sufficient sum and taking advantage of the tax breaks offered by these products.
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