When you take out a mortgage you have two basic options with regard to repaying the amount you have borrowed.

Capital and repayment. With this method you agree to make a monthly repayment which will include both the amount you have borrowed (the capital) and the interest that the lender is charging you. The repayment period can be anything from 5 years to 40 years (or even longer in some cases) and the monthly repayment will vary according to the term chosen. The longer the selected term the lower the repayment, but equally so, the longer the mortgage period the greater will be the amount of interest ultimately paid. It will be found - particularly if the repayment term chosen is a lengthy one - that the mortgage balance will hardly decrease at all in the early years as the majority of the monthly repayment will be allocated to interest. It is only after a number of years that the balance will begin to decrease more noticeably. Provided all repayments are made on the due date, the mortgage will be completely repaid at the end of the selected term.

Interest only. Partly out of necessity (to keep repayments as low as possible) and sometimes for tax or other reasons, interest only mortgages have increased in popularity in recent years. With this type of mortgage, the selected term makes no difference to the actual repayment amount, as the interest only repayment will be the same whether the mortgage period is 5 or 50 years. Because only the interest charged by the lender is being paid - the capital sum borrowed will remain the same throughout the mortgage term. It must be emphasised that at some stage the mortgage amount will have to be repaid, and many lenders want to know at the outset how borrowers intend to do this - whether by sale of the property, an expected inheritance, transfer to a repayment mortgage at a later date, via a savings plan etc. Some lenders insist on a savings plan being in place to run alongside the interest only payment. In the current economic climate. many lenders are limiting the amount of the mortgage they will allow to be on interest only

Obviously, making interest only payments means less outlay, and very often it is the only way that some borrowers - e.g. first time buyers, those on limited incomes or unexpected reduced incomes - can own property at all.

Many who commence a mortgage on an interest only basis do so resolving to convert this to a repayment mortgage ‘shortly' This requires discipline as it is easy to get into the habit of paying interest only and good intentions go by the board

There are those who never take out a repayment mortgage, relying more on the increasing value of the property, and seeing this as more important than often struggling to meet the repayments required on a capital repayment mortgage. Howver, as many have found to their cost, property values do not always automatically increase year on year and property prices can most certain fall as well as increase!

The ideal solution in many cases - especially if you are a first time buyer, or buying a property with a larger mortgage than you are used to, or perhaps recovering from a financial crisis, is to take out an interest only mortgage which keeps your actual commitment lower, but then make regular or one off lump sum payments over and above that minimum commitment, in the knowledge that such additional payments will immediately come off the capital. Most lenders will allow this, and by following this method you are effectively organising a ‘do it yourself' repayment mortgage but without being committed to the capital repayment figure! (Please ask us to go over this with you if we haven't explained it very well)

The bottom line, of course, is that if you take out an interest only mortgage there comes the point when you must repay the capital, and to do this may require judicious financial planning.