Taking out a first charge mortgage is a big step. This information is designed to outline the range of mortgages available and the differences between them.
As the name suggests, a repayment mortgage involves repaying both the capital (money borrowed) and the interest charged on the outstanding amount. This amount is typically more than the interest only alternative, but at the end of the repayment mortgage period, the debt will be fully repaid so there is no need to invest elsewhere.
Interest only mortgage
The monthly payments to an interest only mortgage covers only the interest and none of the capital. This means that the amount borrowed does not reduce. Because of this, money will need to be found elsewhere so that the mortgage can be repaid at the end of the mortgage term, for example, via investments. Although the monthly repayments are less than a repayment mortgage, the risk is higher as there is no guarantee that you will have sufficient capital to repay in full at the end of the term.
Pension plan mortgage
An investment mortgage is also tax efficient, but not flexible. The interest is paid to the lender each month and the loan itself is repaid at the end of the term from the tax-free lump sum that the pension provides on retirement. Because you cannot access your pension until you are 55, this type of mortgage cannot be repaid until then. Again there are no guarantees that the lump sum will be enough to cover the full amount of the loan at the end of the term.
Buy to let mortgage
This is a mortgage usually taken on a second property that you intend to rent out. The repayment method used for a buy to let mortgage can be either repayment or interest only. Lenders use the expected rental income and amount of deposit paid to calculate how much you can borrow.
If you are unsure of your options, it is always a good idea to seek financial advice.