Capital and Interest Mortgage
Also known as a Repayment mortgage where the monthly payments pay both the interest on the amount borrowed and the outstanding mortgage. This is the most popular way of repaying a mortgage as it offers the certainty that the debt will be repaid at the end of the mortgage term.
Interest only Mortgage
A mortgage where the monthly payments only meet the interest on the capital amount borrowed. The capital amount remains outstanding and the borrower has to make provision for repaying this amount at the end of the mortgage term. Most borrowers use the proceeds of an investment, such as a long-term savings plan, an ISA or endowment policy run alongside the mortgage to repay the debt.
An interest only mortgage where the capital at the end of the mortgage term is repaid by the proceeds of an endowment assurance policy. There are risks involved as there is no guarantee that the endowment will earn enough to pay off the mortgage at the end of term.
This is taking out an interest-only mortgage and running an ISA investment alongside in order to repay the capital sum borrowed. There are risks involved as with any stock market investment, but there is the advantage of tax savings in that any savings you make are free from Capital Gains and income tax. Most lenders also require life insurance to cover the amount borrowed.
You can link your personal pension plan with your mortgage loan, so that at the end of the mortgage term part of the tax-free proceeds of the pension fund repays the outstanding mortgage loan. You receive tax relief on your pension plan contributions, but are left with less for your retirement.