While there are many different mortgage options, there are just two types of mortgage, interest only and repayment (capital and interest).With a interest only mortgage you pay the interest only to the lender and take out a further investment alongside which you hope will pay off the loan at the end of the term. Mortgage lenders are fairly flexible about what investment method is used to pay off the loan and popular choices have been endowment policies, unit trusts and pensions.
With a repayment mortgage each payment made pays both the interest and a small part of the capital. With this type of mortgage your mortgage loan will be paid off at the end of the term.
With a repayment mortgage you are using your capital to actively reduce your debt at whatever the prevailing building society interest rate is. With a interest only mortgage you hope that your invested capital will achieve a better rate of return than the building society interest rate.
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