Mortgage Repayment Types
There are two ways a borrower can repay a mortgage. Borrowers can choose the repayment-type model (which is the safest) or they can choose an interest-only repayment model.
Repayment-Type Mortgages
The repayment-type mortgage is the safest mortgage to have. With it, the borrower’s monthly payment consists of the interest incurred on the mortgage plus some of the capital that is owed. If payments are kept up on, the borrower won’t have any reason to fear whether or not he or she will be able to repay the mortgage on time. This is the most popular repayment method in the UK.
Interest-Only Mortgages
The monthly payments on an interest-only mortgage consist of repaying only the interest that has accrued on the mortgage that month. No payment is made toward the capital of the mortgage. In the ideal situation the borrower is supposed to make a payment each month into an Individual Savings Account. The idea is that by the time the mortgage is due, there will be enough money in the Individual Savings Account to pay off the mortgage completely. There is no way of ensuring that the borrower invests enough in the savings account to completely pay off the mortgage.
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