How do I repay my mortgage?

When you take out your mortgage, the bank or building society will expect you to repay them the full amount of the loan, plus all the interest at the end of the mortgage term. There are a number of options, and each will have its advantages and disadvantages. You will need to think about these carefully before you decide which route to take.

Repayment Mortgage (Also known as a Capital and Interest Mortgage.)

This is the simplest of all mortgages and the only type where you are guaranteed to have repaid all you owe at the end of the term, assuming you have made all of the monthly payments. Repayment mortgages work in a very similar way to simple bank loans in that your monthly payments go towards paying both a percentage of Capital (the amount you owe) and a percentage of Interest (the lenders charge for the money). When you first take out your mortgage your monthly payments are set at a level, which will exactly pay off the loan at the end of the agreed term. At the beginning of your mortgage term a high proportion of your monthly payment goes towards paying the interest and a small amount pays off the capital. As you make more payments, the capital is gradually reduced so the proportion of your payments going towards paying off the Capital increases and the amount of interest decreases. This means that if you move house and cancel your mortgage during the early years you may not have repaid a significant amount of the loan because a large portion of your payments will have gone towards paying interest.

MAIN ADVANTAGES
Guarantees repayment of the loan in full.
No reliance on the performance of an investment product.
You can see your loan gradually reducing over time.

MAIN DISADVANTAGES
There is no chance of paying off your loan early without a further injection of funds.
A high proportion of your payments in the early years go towards paying interest.

Interest Only Mortgage

With this type of mortgage the amount you owe remains the same throughout the loan period. You can only reduce the amount borrowed if you pay off part or all of the loan in a lump sum. The capital amount is repaid by an investment typically a PEP/ISA/Endowment or Pension, calculated to accumulate to the same level as your mortgage by the end of the loan period. Some lenders do not insist on a repayment vehicle and the onus of repaying the mortgage at the end of the term falls on the borrower's shoulders - this is obviously the most risky method. The performance of the investment is not guaranteed and therefore repayment of the mortgage is not guaranteed. You should be aware that any shortfall is always the responsibility of the borrower.

MAIN ADVANTAGES
The investment vehicle is portable so it can be used again and again if you move house and change your mortgage.**

MAIN DISADVANTAGES
Does not guarantee to pay off the loan at end of term - particularly relevant in today's economic climate.

** You are strongly recommended to take independent financial advice when considering taking out an investment.
Savills Private Finance can provide you with independent financial advice.

Combined Repayment / Interest Only
(Split Mortgage)

It is possible to have a mortgage where a proportion of it is treated as an interest only mortgage and a proportion like a repayment one. This is most common for people who already have an investment product arranged before taking out a mortgage, which they want to use to help reduce the additional cost of taking out the mortgage. For example, if you want to take out a 350,000 mortgage and already have an endowment that may pay out 100,000 in a number of years time, you could consider an interest-only element to cover the first 100,000 and a repayment element for the remainder.

MAIN ADVANTAGES
The total monthly costs of existing investment product and split mortgage combined could be less than for a pure repayment mortgage with the costs of the investment vehicle on top.**

MAIN DISADVANTAGES
Does not guarantee to pay off the loan at end of term.

** You are strongly recommended to take independent financial advice when considering taking out an investment.
Savills Private Finance can provide you with independent financial advice.

Pension, ISA, Endowment and PEP Mortgages

These are all types of interest only mortgages. They have the name of the investment product added to them so, for example, a 'Pension Mortgage' is a mortgage where the mortgage may be repaid at the end of the term using the proceeds of a pension.