Types of mortgage

Repayment - each month you pay the interest and some of the capital so your mortgage balance reduces each year.

Interest only - you pay the mortgage lender just the interest each month.  The balance outstanding does not reduce but at the end of the mortgage term you have to repay the mortgage.  This is normally by means of one of the following methods.

• Using an existing Endowment policy - the proceeds are used to help repay the mortgage.  There is usually no guarantee that the mortgage will be repaid at the end of the mortgage term but the policy does provide life cover should you die.
 
• Pension - the tax free lump sum is used to assist in repaying the mortgage.
 
• Individual Savings Account - The amount accumulated by regular savings into an ISA is used to help repay the mortgage.
 
• Making substantial lump sum payments in addition to the monthly interest payments.
 
• Sale of property on retirement and moving to a smaller property.

• they face a potential shortfall as their endowment policy (or other savings product) may not fully repay the mortgage.  The options include remortgaging and having part of the mortgage on a repayment basis to ensure any potential shortfall is repaid.  By this method borrowers do not have to take out extra endowment policies or increase their existing premiums with still no guarantee that their mortgage will be repaid in full.
 
• they wish to move and take a larger mortgage but do not want to take out a further endowment policy.  By arranging the extra borrowing (and any potential shortfall) on a repayment basis they ensure that part of the loan will be repaid over the repayment term whilst still making use of their existing endowment policies.

Equity Release - For the older borrower to extract some of the value from their property.  The mortgage is usually repaid by the sale of the property but the borrowers would normally be guaranteed to be able to live in the property during their lifetime.