There are two ways of repaying a mortgage,
repayment, and interest-only. Normally the repayment method means
that the mortgage will be played off by the end of its term. The
interest only method means you pay the lender interest during
the term, and then you pay the outstanding amount back at the
end of the mortgage period. This is done using an investment vehicle;
any money made by this should be used to pay off the loan. In
this situation, you could be left with a surplus or a shortfall.
With a repayment mortgage, each monthly payment is made to your
lender, this includes interest on your loan and a repayment on
some of the capital. Thus your monthly payments will be higher
with repayment mortgage. This also means that as you are reducing
your debt every month it should give you peace of mind, as there
is no chance of a short fall, however you will have to arrange
life assurance as if you died this would pay off the mortgage.
With an interest only mortgage, you need to make monthly payments
of interest to your lender, on premiums for life insurance, and
into an investment vehicle that should result in your outstanding
capital being paid off at the end of the term. When you add these
payments together, you will find it is slightly less than the
monthly payments in the repayment mortgage, however you run a
risk of ending up with a shortfall at the end of the mortgage
term.
