There are two main ways you can pay off your mortgage. These two methods are called “repayment” or “interest only”. Both of them have advantages and disadvantages. Here are a detailed description allowing to know which way is the best for you.

          First method: “repayment mortgage”. With a repayment mortgage you make monthly repayments for an agreed period (the ‘term’) until you’ve paid back the loan and the interest. If you make all the agreed payments, the loan will be fully paid off by the end of the mortgage term. In case of re mortgaging you will usually have paid off some of the ‘capital’ and so will need to pay back less than you borrowed. The repayment is more flexible in this way. Besides if you run into problems keeping up your monthly repayments, you could ask your lender to extend the term or accept interest-only payments for a while. This reduces the amount you pay each month in the short term but increases the total cost of the loan. Your lender might agree to stop your payments for a while.

          Second method: “interest-only mortgage”. With an interest only mortgage you make monthly repayments for an agreed period but this will only cover the interest on your loan.  You’ll normally also have to pay into another savings or investment plan that’ll hopefully pay off the loan at the end of the term. You have to make sure you have enough money to pay back the mortgage at the end of the term. If you are unable you may lose your home. In this respect the second methods of repayment might be more risky. Indeed you need to have some other arrangements for repaying the loan. You will need to make monthly payments to a savings or investment plan to build up a lump sum. You are then taking the risk of repaying your mortgage with a savings plan which is linked to the stock market. Besides if you run into problems your lender may reduce or stop your payments, but you will not necessarily be able to reduce the amount you pay each month into a savings scheme. If you don’t feel comfortable with these risks, you may be well advised to choose the first method, which is the “repayment mortgage”.

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