Once you've decided on the type of mortgage you want, the next step is to choose how to repay it. There are two main options - repayment and interest only:

Repayment (capital & interest)

Each payment you make consists of the interest due and a portion of capital repayment which reduces the amount borrowed.

Every year, the outstanding loan will go down slightly, until you've paid it off completely. In the early years most of the payment is interest, in later years, however, a greater amount is used to reduce the capital borrowed.

It's a good idea to take out a life assurance policy to run alongside a repayment mortgage. That way you know your home will be safe if you or your partner dies. It also makes sense to look at critical illness cover and income protection plans to help meet the requirements if you become too ill to work.

Interest only

You only pay the interest on the amount you've borrowed until the end of the mortgage term. You will need to make separate arrangements to repay the loan at the end of the term.

Lenders accept a number of mortgage repayment methods. You can take out an endowment, or an individual savings account (ISA), or you can make repayments through a personal pension plan. Here's an explanation of the various ways to repay your mortgage:

Endowment

This is a protection plan specifically for mortgages.

If investment performance exceeds the original amount quoted you may be able to repay your mortgage early, or benefit from extra funds at the end of the term.

An endowment plan is a long-term investment designed to give a lump sum at its completion. However, if investment performance is poor, this may not be enough to repay your mortgage. It's up to you to make sure you have enough to repay the mortgage, although some endowments include reviews to keep them on track. If you cash-in your plan early, you may not get back all the premiums you have paid.

Individual savings account (ISA)

The returns from ISAs are tax-efficient. They offer the opportunity of high returns. ISAs do not include critical illness or life cover, so you may have to arrange your own. ISAs are only guaranteed by the Government to be available until 2009. Unlike some endowments, ISAs do not include reviews to check your investment is on track.

Pensions

This is an option if you don't belong to a company pension scheme. When you retire, you simply use the tax free cash lump sum from your pension plan to repay your mortgage – although it will reduce the pension income you subsequently receive.

Life cover can be included. You can not normally take retirement benefits before your 50th birthday (This will increase to age 55 from 2010). This gives you less flexibility if you want to repay your mortgage early.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen

Take advantage of our comprehensive, professional mortgage service. Arrange an appointment with a Belmont Financial Adviser today.

Notes

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.