Interest Only
This is a type of mortgage that involves monthly repayments of interest on the mortgage but none of the capital. At the end of the loan term the entire balance of the mortgage must be repaid. In order to repay the loan at the end of the term you need to take out a separate savings or investment plan into which you make regular monthly payments. This could be a pension plan or an endowment for example. The payments you make are then invested in stocks and shares on your behalf and in theory there should be enough money in held in your policy to pay off your home loan at the end of the loan term.
The disadvantage with this type of repayment plan is that although the stock market generally performs well in the long term (i.e. in 20 -30 year cycles), there is absolutely no guarantee that this in fact will be the case with the stocks and shares chosen for investment on your behalf. Many people have come unstuck in recent years as a result of poorly performing endowments recommended to them by their own mortgage lenders.
Repayment Mortgage
This is also sometime known as a 'capital and interest mortgage' and is one of the most popular types of repayment systems in the mortgage market. Each monthly repayment is made up of part interest and part capital payments. Initially your monthly repayment consists of mostly interest but as each payment chips away at the capital, thereby attracting less interest, towards the end of the loan term you'll find that you're paying very little interest and that the repayments are mostly capital. In this way, although the repayments may be higher than if you had an interest only mortgage you are at least certain that at the end of the loan term your mortgage will be paid off.
The loan term is normally around 25 years and unlike an interest only mortgage which has a life assurance policy attached, you will need to organise a separate policy to ensure that your mortgage balance will be paid in the event of your death. It may seem like extra hassle, but it's probably a small price to pay for the knowledge that your mortgage will be paid provided that you keep up your repayments and insurance premiums.
