Mortgage Guide

Repayment Types

There are two ways in which you can repay your mortgage. These are:

Capital and interest repayment (the associated mortgage is called a repayment mortgage). With a repayment mortgage, your monthly payments cover the interest charged and also include an element of capital repayment. You will therefore see your mortgage debt decreasing over time. It should be noted that in the early years, most of each payment is used to cover the interest charged. As the mortgage debt decreases, a higher proportion of each monthly payment is used towards capital reduction. The lender may insist that life cover be in place to cover the mortgage debt.

Interest repayment (the associated mortgage tends to be referred to as an interest only mortgage). With an interest only mortgage, your monthly payments only cover the interest charged and therefore the mortgage debt will remain at a constant level. In most cases, the lender will insist that you have an investment plan that will pay out a lump sum at the end of the mortgage term to repay the mortgage debt. In addition, the lender may insist that life cover be in place to cover the mortgage amount. The plans most commonly used for this purpose are a low cost endowment plan, ISA, a unit trust type plan or a pension plan. Endowment plans have life cover built into them, whereas pension plans and unit trust type plans do not. In these cases, separate life cover would be necessary.

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