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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. No matter which one you choose there will be some form of interest to be paid. With a capital repayment mortgage you pay interest on the mortgage plus a small amount of the capital borrowed so that the loan is gradually reduced every month. If you choose this form of mortgage over, say, a 20 or 25 year period, at the end of the period the loan will be paid off. 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. A very common repayment vehicle used for many years but less nowadays is known as an endowment. A mortgage endowment is a life insurance policy for the whole size of the mortgage that also builds up a cash value through contributions and effective investment returns. The theory behind this plan is over the term of the mortgage the size of the endowment plan builds up a sufficient cash value to meet the size of the mortgage at this point it can be cashed in to repay the debt in full. It has to be said however that all an interest only mortgage needs is a suitable amount of money in order to repay it. So Endowment policies are far from the only repayment vehicle that can be used effectively. Owning to the fact that most pension policies can quite effectively produce lump sums as well as a pension they can also be used as repayment vehicles in their own right. All you do is pay into a pension a sufficient amount of money to ensure that the tax free cash is enough again to meet the size of the debt at the end but you also get a pension in the bargain. A lot of people see pension link mortgages as very effective repayment vehicles especially when you factor in the excellent tax advantages associated with them. There are several forms of repayment vehicle nowadays, such as savings plans, personal equity plans and even personal savings accounts. In truth any type of savings, including bonds and unit trusts can be used as long as they are going to be enough to pay off the whole mortgage loan. But remember that all investment plans come with some risk. You are putting your money in an unpredictable market so you can be at risk if it doesn't perform as hoped. To sum up, there are repayment and investment mortgages, but with investment only you must also factor in the repayment vehicle. Anyone looking to take on a mortgage should get professional advice in order to find the right option for you as an individual, but that advice is especially crucial when considering the interest only option as mis-investment can prove to be very expensive in the long run.
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