Repayment of Capital
There are two main ways to actually repay the money (capital) that you borrow.
1. REPAYMENT MORTGAGE
You can pay some of it back each month, slowly reducing the amount you owe - a repayment mortgage (sometimes called a Capital Repayment Mortgage). The repayment route is the safest as you can be sure that the mortgage will be paid off at the end of the term if all mortgage payments are met.
2. INTEREST-ONLY MORTGAGE
You simply pay the interest on the loan each month and agree to repay the original amount borrowed at the end of the mortgage (normally 25 years). In once sense you might view this as deferring the actual repayment of the mortgage until the last day. Obviously you need to have the money available in order to do this at the right time.
You can build up enough money by using nearly any form of savings or investment, provided that you have the right amount at the right time. Typically you might use a tax-free form of investment such as an Individual Savings Account (ISA).
Clearly with investments you must review how things are going to be sure that you will have enough money at the right time. So an interest-only mortgage carries the risk that you might not have enough money to repay the mortgage in full - it is vital that you understand this as the lender will require full repayment of the mortgage.
COMBINATION
There is nothing to stop you putting part of your mortgage on a repayment basis and part on an interest-only basis.
OFFSETTING MORTGAGE
This is either a repayment mortgage or interest-only mortgage, but if you have cash savings the interest that you pay is based on the difference between your cash savings and the amount of the mortgage left. In other words you offset your cash savings against the mortgage and pay the interest on the difference.
We have created a range of useful calculators to help you explore the options open to you, but you should treat these as guides.
Try out our Calculators