Repaying debts

However much you borrow you will have to repay the loan by the end of your chosen term, together with the interest it has accrued. There are two ways to pay off your mort­­gage: you can either make monthly repayments towards the capital and interest or opt to pay off just the interest each month.

Repayment mortgages
Each month you pay back some of the capital you borrowed to buy your home and some of the interest. In the early years the majority of your monthly repayments go towards paying off the interest but in later years they reduce the capital you owe. By the end of your chosen mortgage term you will have cleared the loan.

Interest-only mortgage
This is a mortgage where only the interest is repaid each month. At the end of the term you have to find cash to repay the capital you borrowed. You could do this by selling your property, for example, with an inheritance or with the proceeds of an investment vehicle. Most borrowers will choose one of the following:

Endowments
There are several different kinds of endowment policy but all pool your money with that of other investors and invest at least some of the fund in the stock market.

If you choose an endow­ment-backed mortgage you are taking a risk: the invest­ment may not perform as well as expected and you could end up with a gap between the value of your endowment and the amount you have to repay.
If you’re concerned that your policy won’t make enough to pay off your mort­gage, you can increase your payments, pay off some of your mortgage as a lump sum or through regular payments, start up another investment such as an ISA, or combine some of these elements.

Unlike other investments, endowments include life insurance. This will cover your debt should you die before the end of the mortgage term.

ISAs
Individual savings accounts (ISAs) offer you the chance to earn money on your invest­ment without paying income tax or facing a capital gains tax bill when you withdraw your cash.

To earn enough to repay your mortgage you will prob­ably need to invest in some sort of equity ISA, which means having exposure to the stock market. There are no guaran­tees that your invest­ment will grow enough to cover the capital you need to repay.

Pensions
You can back an interest-only loan with a personal pension. At the end of your mort­gage term you withdraw a tax-free lump sum from your pension pot to pay off your mortgage debt. You must be aged 50 or over at this time and you can only take out up to a quarter of the fund.

Like other investments, the pension may not grow enough to enable you to pay off the capital you owe.