Three well known types of interest-only mortgages are:

ENDOWMENT MORTGAGE

How does it work?

You make two payments per month. One to the lender to repay the interest on the amount borrowed, the other to an insurance company for an endowment contract. There are mainly two types of endowment: unit linked or with profits. Both invest in a broad range of assets including stocks and shares. The capital in the endowment builds up over the term of the mortgage to repay the outstanding capital.

ADVANTAGES: This one's very flexible. You can take the endowment policy with you if you move home or change mortgage lender. Endowments usually include some kind of life cover and some also include critical illness cover. This can be a cheaper method of buying such cover under usual conditions. If the endowment contract performs well, you may accumulate more funds than required to repay the loan. However, endowments are not risk- free as there is some investment in the stock market.

DISADVANTAGES: There is a possibility your fund may not build up sufficiently to repay the capital. Taking financial advice, carrying out regular reviews and generally keeping a watchful eye on your fund's performance will help to prevent this happening.

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