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Repaying your Mortgage

You need to know the options you have to repay what is probably going to be the biggest debt you'll ever have!

There are two main options ... a repayment mortgage, or an interest only mortgage. It may be possible to combine the two.

Here's how they work.

Repayment Mortgage

A repayment mortgage works in the same way as most types of loans. You make a regular monthly payment to the lender, and the payment is made up from capital (i.e. repaying the money you've borrowed) and interest. So, providing you keep up the appropriate payments, at the end of the term you will have repaid the loan in full.

Interest Only Mortgage

With an interest only mortgage, you pay only the interest to your lender. This means you need to make a separate payment into some sort of savings plan, so you can build a lump sum to pay off the mortgage at the end of the term.

The three main types of savings plans are - ISA's pension plans and endowment policies.

Whichever savings plan you choose, it is vital you keep up the contributions and also make sure your policy is regularly reviewed to ensure it is on target to repay the mortgage at the end of the term. It is important to remember that these types of investment are long term commitments and are unsuitable for people who might not be able to maintain their payments until the end of the term.

'Part and Part' Mortgage

As mentioned, some lenders may allow you to combine both repayment methods.

For example, if you took out an interest only mortgage for your first home for £150,000 and you are looking at purchasing your second home at a cost of £250,000, you may want to keep your existing savings plan arrangements until the policy matures but borrow the additional £100,000 as a repayment mortgage.

Your 'attitude to risk' with regard to borrowing will obviously affect how comfortable you are with the interest-only approach or the repayment method


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