A repayment mortgage guarantees your loan is paid off in full at the end of the agreed term.
With a repayment mortgage you make monthly payments that cover both the interest on the loan and the repayment of the loan itself.
This brings the peace of mind of knowing that you are reducing your debt every month.
A repayment mortgage offers the reassurance that once the final payment has been made you will have paid off the mortgage in full (providing all the repayments have been made).
With an interest-only mortgage you only pay-off the interest on the loan and none of the outstanding debt until the end of the term.
Your monthly repayments are usually made up of three parts:
Interest-only mortgages usually have lower monthly payments than a repayment mortgage but are inherently more risky. There is no guarantee that the investment plan you choose will generate sufficient capital to pay off the outstanding debt at the end of the mortgage term. However, should your investment be successful, you may be able to pay off your debt and have a lump sum left over, or even clear the debt in advance of the expected date.
With a combined mortgage a proportion of the loan is treated as an interest only mortgage and a proportion as a repayment mortgage. Therefore, you will use both repayment and interest-only methods to repay the loan.
If you have an existing investment policy in place before seeking a mortgage you may want to consider this option.
This type of mortgage is most common with people who already have an investment product (an endowment, ISA or pension plan) arranged prior to taking out the mortgage and want to use this to help reduce the additional cost of taking out the mortgage.
It is possible to use an investment policy to repay part of the loan, and then pay the remaining part with a repayment mortgage. For example, if you want to take out a £350,000 mortgage and already have an endowment that could pay out £100,000 in a number of years time, you could consider an interest-only element to cover the first £100,000 and a repayment element for the remainder.