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When you take out a mortgage there are two options available to the borrower regarding repayment terms. A repayment mortgage is made up of capital and interest, where as a n interest only mortgage is just interest.

The major difference between the two is that at the end of a 25 year mortgage the balance of the repayment mortgage will be 0 whereas with the interest only mortgage the balance out standing will be the same as when the money was first borrowed.

There are a few options available to repay the balance of an interest only mortgage. An endowment, pension, or ISA can all be used to repay the balllance at the end of term. However there is a risk associated with these products as if they have not performed over the last 25 years there will be a short fall at the end and not enough money to pay off the mortgage.

Some people when they take out an interest only mortgage do not have any repayment vehicle in place and rely on the property going up in value over the term, then selling the property downsizing to a smaller house and using the profit to repay the mortgage. This is also a risk as there maybe problems in selling the property at the end of term, the property may not have gone up enough in value to repay the mortgage and then leave a sizeable profit to pay for retirement.

In recent years people have used endowments to pay of there interest only mortgages. With an endowment you pay a monthly sum to a company who then invest the money in the hope that the investment will return enough to pay off the mortgage. The other benefit of an endowment is that the come with life cover built in and if you where to die before the end of the term the endowment will pay out the sum insured which is normally the balance of the mortgage.

However although this sounds like a great deal over the last 10 years people have shied away from endowment mortgages as the stock market has underperformed and at maturity the investment have been 000’s short leaving homeowners with big problems as they then either have to extend the term of the mortgage and convert to repayment, which late in life and nearing retirement is not a good thing or people just sell up and down size.

At the end of the day an interest only mortgage can be a cheap way of getting on the property ladder but with all the risk involved a repayment mortgage will always be the safest option.

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