You borrow for a fixed period of time - called the 'mortgage term'. Your monthly payments cover only the interest on the loan. At the end of the term, you pay off the capital in one lump sum.
It is your responsibility to build up savings so you have the money you need to repay the capital (the amount you borrowed) at the end of the term.
You can do this in several different ways:
An endowment mortgage combines an interest-only mortgage with an endowment policy which includes life insurance cover. The endowment policy itself is not a mortgage - it is a long term investment. As well as paying interest on the mortgage/loan, you make regular payments to the endowment policy.
The aim is to build up a fund by the end of the mortgage term which matches the loan you must then pay off. The amount you save each month is set at a level which makes this goal possible, provided your investment grows at an assumed rate.
The actual growth of the investment is linked to stock market performance and may be more or less than the assumed rate. Do not choose an endowment mortgage if you are uncomfortable with this investment risk.
These are like endowment mortgages, except that instead of combining a mortgage with an endowment policy, you choose a different type of investment to pay off the mortgage loan at the end of the term.
The return on the investment is typically linked to stock market performance. There is no certainty that it will grow enough to pay off the mortgage in full. So, these types of mortgage are not suitable if you are uncomfortable with investment risk.
Currently, you save through either an ISA or a personal pension (which could be a stakeholder pension scheme).
There are different types of ISA. For mortgage purposes, you are most likely to use a stocks and shares ISA investing in, for example, unit trusts.
In the past, you may have saved through PEPs (personal equity plans). From 6 April 1999, you have not been able to pay any new money into PEPs but you can keep going any PEPs you had already started before that date. From 6 April 1999, you should have switched your new savings to ISAs instead.
If you choose an ISA or a personal pension to pay off the mortgage loan, you may need to take out separate life insurance cover if you have dependants.
For more details see the Financial Services Authority's Guide to Mortgages
Info adapted from the website of the Financial Services Authority (FSA)
