Whilst most people appreciate that when borrowing money there is a need to repay it, in this day and age with interest only mortgage abound the ultimate goal of actually repaying the mortgage can be sometimes lost. In this article we discuss the ways mortgages can be set up and the overall need to ensure that some way repayment needs to be a priority.



Firstly, you need to understand how mortgages are set up. Regardless of the many types of interest deals around, mortgages come in two basic forms. Capital repayment and interest only.

All mortgages, capital and interest only, carry some level of payable interest. With capital repayment it is fairly simple. You pay off the interest as well as a small portion of the capital so that each month the level of the debt is reduced. By paying your mortgage off this way, and by reducing the debt each month, by the end of the 25 year term, presuming it is 25 years, you can safely say the whole debt will be repaid.

Interest only mortgages are as they sound. You are just paying off the interest accrued and the initial debt doesn't change, meaning that you must make arrangements to pay this off some other way. This may sound very risky at first as the debt is not being steadily cleared, but there are a few ways around this. One method is to arrange what is called a repayment vehicle.

One method which used to be very common but is now less in favour is an endowment policy. An endowment is effectively a life insurance policy which runs the duration of the mortgage but which also accrues cash through contributions and returns on investments. The principle behind this is that by building up this cash pot, by the end of the term of the mortgage you have amassed enough capital to pay off your debt in full.

However, with an interest only mortgage you really only need to gather enough money to pay off the initial loan so there are other ways to go than just endowment. A pension policy can also generate enough cash to give out a lump sum as well as a pension, and so could be employed as your repayment vehicle. All you need to assure is that the money you are paying into a pension policy is enough to guarantee that at the end of the term you have sufficient tax free money to pay off your debt on your home whilst also leaving enough extra to give a pension. Pension link mortgages can be a very attractive option, in particular when you consider the tax benefits attached to them.

Savings plans, personal equity plans and even personal savings accounts can all be used as repayment vehicles now. But in honesty any type of savings plan, including unit trusts and bonds, can be used as long as they create a sufficient lump sum. However, with that, it must be remembered that with any sort of investment plan you are always at risk if it doesn't produce the returns you were hoping for.

So you can see, there are basically repayment and investment only mortgages. With investment only, you must also allow for the repayment vehicle. Whatever option you choose, but especially if opting for investment only, you should seek advice from a professional. It will prove invaluable. Particularly in the case of investment where a misdirected decision can be very costly indeed.