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There are really only 2 types of mortgages which are either repayment or interest.

Repayment

This type of mortgage is calculated based on that one will pay the mortgage off in a set number of years, that is when you make monthly payments it clears some of the mortgage balance as well as the interest part. Most residential mortgages these days are of this type and around 25 years long.

Interest Only

These type of mortgages are calculated where you are just paying off the interest part of the mortgage. Therefore at the end say a 25 year term you will still owe the same amount as at the start when the mortgage was taken out, and require to setup a repayment vehicle such as

  1. Savings
  2. ISA
  3. Investment fund
  4. Pension
  5. Sell the property

Today these are still popular with buy to let investors because

  1. Mortgage payments are cheaper
  2. Flexibility
  3. Use the mortgage payment savings for another investment, which in turn will pay off the lump sum at the end of the mortgage term.

The disadvantages are

  • More expensive overall as you are not re-paying the mortgage and therefore the amount of interest will not go down.
  • More complicated as require a repayment vehicle.
  • Risk if the repayment vehicle does not perform and therefore not being able to pay the mortgage off at the end of the term.