How to repay?

There are two ways to pay off your mortgage loan. The first is the repayment (or capital-and-interest) mortgage. The advantage of this method is that you can be certain that your mortgage loan will be fully paid off at a given date in the future, normally in 15-25 years.

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The downside is that your monthly mortgage repayments will be considerably higher than with the other type of repayment model – the interest-only mortgage (see below). This is because part of the money repay every month is used to pay off the mortgage interest, and the rest is used to pay back a portion of the capital you borrowed.

To begin with, you will mainly be paying off the interest but, nearer the end of the loan’s life, your monthly repayments will primarily be used to reduce the capital sum borrowed.

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The interest-only mortgage does exactly what you would expect. Your entire monthly mortgage repayment is used to pay off the interest on your loan – none of the capital you have borrowed will ever be paid off. While this does reduce your monthly repayments, it also means that you will need to set up a savings plan if you wish to own your home outright at some point in the future.

The most common savings plans used are stockmarket-linked, e.g. shares or unit trusts held in an Individual Savings Account (ISA), or endowment policies. Both methods expose you to stock market risk that could lead to you having to top up your repayment fund if investment performance goes against you. Of course, if performance goes well you could end up repaying your mortgage early.