Mortgages - Interest Only & Repayment Mortgages.

A mortgage is a legal document pledging property as security for the payment of a loan. It is a formal document, which proves the legal claim on your property that the lender holds as security for the money you borrowed. There are two people involved in a mortgage, you and the lender. However, if you do not pay the debt as agreed the lender, through a court proceeding, can force the sale of your property to pay off your debt.

An interest only mortgage is where the repayments are set against the interest on the loan only, so only the interest is being paid. This means that by the end of the mortgage term, the capital originally borrowed is still outstanding. Borrowers are advised to make regular payments into an investment policy, such as an Endowment mortgage, an Individual Savings Account (ISA) mortgage or a pensions mortgage, to pay off the balance. This type of mortgage usually works out cheaper because only the interest on the loan is being paid. However, at the end of the mortgage term, if you do not have enough savings to pay off the balance, you risk losing your home. It is also worth noting that this type of mortgage is preferred if you intend to move home, as it is usually not dependent on staying in the one home, therefore it can work out cheaper in the long run.

A repayment mortgage is one where the borrower pays the amount of capital borrowed plus the interest on the loan. This is the most straight forward type of mortgage, as borrowers know exactly what they are paying back – the amount borrowed plus interest. If you intend to move home with this type of mortgage, you will most likely have to arrange another mortgage with a term of 25 years or so, in order to keep your payments affordable. You usually do not require to have an additional investment policy for this type of mortgage, so are not investing in the stock market.

A flexible mortgage is one where you can vary the payments you make from month to month. For example, if your income is changeable, if you receive bonuses regularly, if some months you have a higher expenditure, you can choose to pay less or more to your mortgage. With other mortgages, you can incur a charge for this. A flexible mortgage is more suitable for some people; however, the mortgage lender will have a minimum payment arrangement is adhered to.