There are different types of mortgage. The two main types are:
- repayment mortgages
- interest-only mortgages.
Whichever type of mortgage you have, it’s important you keep up to date with your regular payments. Your lender will send you a statement once or twice a year. This will show how much you have paid, the monthly payments that are due, and what is left to pay. Most lenders also have online banking, so you can see the up-to-date details for your mortgage at any time.
If you are worried or want to ask questions, always contact your lender.
Repayment mortgages
This is the most common type of mortgage. Your monthly payments are calculated so that you pay back the capital and the interest on the loan. At the end of the term, you will have paid the mortgage off in full and own your property.
Interest-only mortgages
With these mortgages, instead of paying the capital and the interest, you only pay the interest. Monthly payments are cheaper, but at the end you will still owe the full amount of capital you borrowed. This means you need to have a way of paying back the capital when the term ends.
It is now very difficult to get an interest-only mortgage. This is because of concerns about people not having a plan for paying the mortgage back at the end of the term. To get this type of mortgage now, you usually need a high income and a large amount of equity in your property. The equity is the difference between what you have left to pay on any mortgage or loan on your property, and what the property is currently worth.
However, you might have an interest-only mortgage that was taken out before the new rules applied. If you do, you should have received a letter from your lender reminding you to plan how you will pay back the capital at the end of your mortgage term. You might plan to do this through:
- an endowment mortgage (see below)
- another type of investment (see below).
Endowment mortgages
With endowment mortgages, you usually pay the interest on the mortgage loan over a set period and you pay money into a savings plan. The savings plan is called an endowment insurance policy.
The aim is that the money in the endowment insurance policy will pay off the mortgage at the end of the term. The amount of money you get back is called the return. This return is linked to the stock market, which means the money you get back may not be the amount you were hoping for. And there is normally no guarantee that it will pay off your mortgage in full.
The endowment insurance policy gives you life insurance. It can sometimes include critical illness cover. The endowment insurance policy is not usually with the same company as the mortgage.
In the past, some people were sold endowment mortgages when they should not have been. They were given misleading advice. Because of this, endowment mortgages are no longer sold. However, you may have an endowment mortgage you took out some time ago. If so:
- you need to make sure your endowment insurance policy will pay out enough to cover the mortgage at the end of the term
- you should receive an annual update on how your endowment insurance policy is performing.
If you are concerned that your endowment insurance policy will not pay out enough money to cover your mortgage at the end of the term, you should talk to your lender about your options.
Other investments
Some people will have other investments that they plan to use to pay their mortgage. These might include individual savings accounts (ISAs) or a pension.
ISAs
An ISA is a savings account that can save you money on tax. Each person can save up to £15,240 (for the 2016–17 tax year) in an ISA each year, and the interest you earn is tax-free.
There are two types of ISA:
- Cash ISAs.
- Stocks and shares ISAs (also called equity ISAs). These are investment accounts. Rather than putting cash into a savings account, you can invest your money in the stocks and shares of companies.
You can save the full amount for your mortgage in a cash ISA or stocks and shares ISA, or split your savings between the two.
If you save your money in a stocks and shares ISA, you could lose money if the stock market does badly. Cash ISAs are safer, but the returns are usually lower. You should always be aware that the value of investments can go down as well as up, and consider this when investing your money.
Your husband, wife or civil partner (but not an unmarried partner) can now inherit your ISA allowances when you die. This means they will get the value of your ISAs added to their own allowance in a one-off increase. They get this increase even if you do not leave the money or investments in the ISAs to them.
But if you do leave the investments to them, they can take over the ISAs with the investments included if they want to. This may be important if you have a joint mortgage.
Pensions
Some people may choose to use some of their pension to pay off their mortgage.
You can access private pension savings from the age of 55. Since April 2015, pension savers have had more choice about what to do with the money they have saved in their pension. This includes the option to take it out as cash. Be aware that if you use pension savings to pay off your mortgage, you will have less to live on when you retire.
If you die before the age of 75 and you have not yet used your pension savings, they can be passed on tax-free in your will. This may be important if you have a joint mortgage.
Interest-only mortgages without a planned repayment method
Some people may already have an interest-only mortgage without having planned a way to repay the loan. They may decide to:
- switch to a repayment mortgage
- sell the property to repay the loan
- repay the mortgage in the future with money from an inheritance.