A Comparison of both

Will it pay off the mortgage?

Yes, as long as you make all the payments agreed with the lender, the whole loan will be repaid by the end of the mortgage term.

No, not on its own. You need to have some other arrangement for repaying the loan. You will need to make monthly payments to a savings or investment plan to build up a lump sum.

But there is a risk that the plan will not grow enough to pay off the mortgage in full.

Moving home and re mortgaging

Whether you move home and stay with the same lender or take a mortgage with a new lender, you will need to repay the mortgage and start a new one.

You will usually have paid off some of the ‘capital’ and so will need to pay back less than you borrowed.

When arranging your new mortgage, even if you are borrowing more, see if you can afford the new monthly payments over the term that you had left on the last mortgage – you don't have to take a repayment mortgage over 25 years.

Because you won't have repaid any ‘capital’ you will need to pay off the same amount that you borrowed.
But you can carry over any accompanying savings plan to your new mortgage and the mortgage term for this part of the loan will be what's left of the term of the plan (that is, you don't need to start again).
If the new mortgage is bigger than the old one, you need to decide how you will pay off the extra loan (this could be done on a repayment or interest-only basis).

Is this a suitable mortgage for you?

Yes, if you want to be absolutely sure that your loan will be fully repaid at the end of the term. Don’t forget your monthly payments could increase if interest rates rise.

Whether an interest-only mortgage suits you depends on whether you’re comfortable with taking the risk of repaying your mortgage with a savings plan which is linked to the stockmarket.

If you are not comfortable with this risk, a repayment mortgage is likely to be a better choice.

Endowment mortgage - a type of investment which aims to build up the lump sum you need by investing in shares or unit-linked schemes. You must save into the investment plan every month until the mortgage term ends.

Life insurance - is built into it. Some policies include cover for critical illness, accidents or unemployment.

Risk – varies with the type of investment you choose. With-profits funds are aimed at people seeking medium-risk investments; unit-linked funds often enable you to switch between funds, so you can choose the risk profile that suits you.

Commission and charges – these are taken out of the fund which means less of your money is invested to grow.

Inflexible – there may be financial penalties if you stop paying into the plan before the end of its full term or cash it in after only a few years.

Keeping track – Your policy provider will send you reviews every 2 years. You may need to increase your payments if the investment is not performing well.

Pension mortgage - your savings are paid into a personal pension plan from which you eventually take a tax-free lump sum and use it to repay the loan.

Tax – you get income tax relief at your highest rate on contributions you make into the pension plan. The lump sum you get when you retire is tax free.

Life insurance – is built into the pension?

Charges and premiums – can be high if you need to ensure your investment will pay off the mortgage.

Inflexible – you can't take any of the money till at least age 50 and this could rise to 55 by 2010.

Life insurance - not included. But if you die before pension age, the money in your fund could be used to pay off the mortgage - but it may not be enough.

Risk –There will be less money for your retirement because you're using the lump sum to pay off the mortgage.

Keeping track - could be a problem as there's no automatic review process. You may need to increase your payments if the investment is not performing well.