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Types of Mortgage
Obviously, aside from making savings by wise choice of mortgage special offers, one of the keys to finding the right mortgage lies in choosing the right type. They come in one of two forms, both of which have their benefits and pitfalls for the unwary borrower.
Repayment mortgages are the most common, these work by the borrower repaying both the loan itself and the interest accrued on it over a fixed period, at the end of which the total borrowed is entirely repaid.
Alternately there are also Interest-only mortgages which work slightly differently: the interest is repaid as in a Repayment mortgage but the capital borrowed is covered by an investment set up by the borrower.
Not surprisingly, the success of your investment is of vital importance when it comes to paying off the mortgage - if you have made a larger sum than the value of your mortgage then you are in profit, however, if there is a shortfall, this will need to be made up from other sources.
Interest-only mortgages have, in the past, generally come in the form of endowment policies which rely on investments in life assurance, but these have been seen to leave shortfalls more often than not. So now ISA or pension based mortgages are perhaps a more tempting option, as they can offer good tax breaks. The one thing it is worth remembering about any kind of Interest-only mortgage is that it will always be more risky than a Repayment mortgage.
Generally you cannot switch between Interest-only and Repayment mortgages, but some lenders are starting to offer this, particularly for those with endowment investment shortfalls who want the predictability of a Repayment policy.
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