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Mortgage Basics - part 2
With the Repayment method, every time you make a payment, you are paying off a bit of the capital and a bit of the interest. At the end of the mortgage term, this means that everything will be paid off and the property is yours.
With the Interest Only method, you are doing what it says on the tin – paying off the interest only element of the borrowing. You will still need to find the capital amount at the end of the term to be mortgage free and actually own the property.
To pay off the capital amount, you will need to have some sort of investment fund. In a perfect world, by the time the interest is paid off, your investment fund should have been working really hard and have given you enough money to pay off the capital.
However, if your investments don’t perform well, you could find yourself at the end of the mortgage term with a cash shortfall that you will need to find. If you haven’t got the money, your home could be repossessed.
Therefore, do be aware that interest only mortgages can be risky if your investments fail to do their job properly.
Finally, just a brief word on endowment mortgages. These are a form of an Interest Only mortgage. The endowment element is a combination of savings, investments and life cover all lumped together in to an insurance policy.
Endowment mortgages used to work so that at the end of your mortgage term, you could almost be certain that the endowment policy would pay off the capital. However, with investment returns falling in recent years, many people will not have enough money to pay off their capital at the end of their mortgage term. They will have to find it elsewhere – or they could lose their home.
The general consensus now is that you should avoid taking out endowment mortgages and that is why there are so few of them in the mortgage market place.
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