Interest only mortgages

You can repay a mortgage in two ways: Interest-only or repayment (sometimes called capital and repayment).

How do they work?

With a repayment mortgage, you pay back both the amount you originally borrowed and the interest.

With an interest-only mortgage, you just pay interest. And because you are only paying back interest, the monthly payments are lower than on repayment mortgages.

However, if you've got an interest-only loan, remember that once the mortgage matures you'll still have to pay back the original amount you borrowed.

How do I repay the amount borrowed?

It's best to have a plan as to how you'll do this when you take out the mortgage: Consider monthly payments into an Isa, which - if invested sensibly - should grow by enough over the term of the mortgage to repay it.

However, there are no guarantees this will happen. Whereas with a repayment mortgage, you know that as long as you keep up payments, your mortgage will be paid off at the end of the term.

Are interest-only mortgages popular?

Millions of homeowners have them, and many do not have any repayment vehicles in place to repay the principle.

This is worrying regulators and lenders, and many now are demanding borrowers show they have a repayment plan before they will advance interest-only loans.

So which is better, repayment or interest only?

Interest-only may be cheaper in the short-term, but unless you are in a financial fix, have substantial savings or have a good repayment plan in place, the repayment route is preferable.