How to get the best mortgage deal Mortgage repayment methods

A repayment mortgage guarantees you'll pay it off by the end of the term

You can take your mortgage out on either a repayment basis on an interest-only basis. Visit the mortgage calculators offered by Which? Mortgage Advisers to find out what your repayments would be at different interest rates, see how much you could borrow and work out how much you can afford to spend on a mortgage.

Repayment mortgages

These can also be called 'capital and interest' repayment mortgages.

You gradually pay off the amount you borrowed over the term of the loan, together with interest. You make one payment each month to your lender. Part of it goes towards repaying the interest that your lender charges and part goes towards repaying some of the money you originally borrowed.

Repayment mortgages guarantee that the whole loan is repaid by the end of the term, making them a low-risk option.

Interest-only mortgages

With interest-only schemes you only pay back the mortgage interest during its term. Your payments to your lender will go towards repaying the interest charged - you don't actually repay any of the money you originally borrowed (the capital).

This means you should simultaneously make other arrangements for paying back the capital. This typically involves paying a separate monthly amount into an investment (such as a stocks and shares Isa).

However, there is no guarantee that the investment will grow enough to pay off the mortgage in full at the end of the term. If the gamble doesn't pay off, you will face a shortfall when you come to repay your mortgage.

You also end up paying more interest overall on an interest-only mortgage as you are paying interest on the whole loan for the whole term.

If you feel you could use professional advice, the Which? Group offers an independent mortgage advice service that looks at every mortgage from every available lender. Alternatively, visit Unbiased.co.uk to find a mortgage broker in your area.

Endowments

In the past, interest-only mortgages were more commonly linked with endowment policies as a repayment vehicle.

Endowments are classed as 'risky' products because they’re investments related to the performance of the stock market. There’s always the possibility that if the stock market doesn’t grow enough, your investment might not become big enough to pay off the total amount of your mortgage.

Many people still have either, all or part of an existing mortgage that is dependent on an endowment policy. Some are facing shortfalls on their mortgage when it matures because their endowment won't be providing as much as was promised.

Because of their poor history, endowments are now rarely, if ever, recommended for interest-only mortgages.

If your endowment policy hasn’t increased enough to pay off your mortgage, you will need to find some other way to pay off this part of your mortgage.