An interest only mortgage is where each monthly mortgage payment only pays off the interest on the money you've borrowed.

In other words, not a single penny of the capital is repaid, leaving you owing the full mortgage balance at the end of your mortgage term.

In order to address this issue, the borrower takes out an alternative repayment vehicle such as an ISA, pension plan or endowment policy...

Endowment
An endowment policy is a long-term savings scheme where the funds are invested mainly on the stock market. When you come to the end of your mortgage term you cash in your investment and use the money to settle the capital amount originally borrowed.

Endowment mortgages used to be extremely popular popular until they received bad publicity in the late 90's when many endowments were unable to cover the original mortgage amount, leaving millions of policy holders with a shortfall.

ISA
The Individual Savings Account (ISA) is a tax free method of saving that generally offers better value than endowments.

There are two classes of ISA available - a maxi ISA and a mini ISA - and you are currently allowed to save up to £7000 in any tax year. In any one tax year you are allowed either one maxi ISA or up to three mini ISAs.

An ISA may be a stocks and shares, cash or life insurance investment. Maxi ISAs are typically stocks and shares investments, which is why they are commonly used to support mortgages.

The accumulation of capital to repay the mortgage is totally dependent on the performance of the funds chosen.

The ISA has no fixed term so if the investment has performed particularly well the outstanding capital may be repaid early.

Pension Plan Mortgage
This is another tax-free method of paying off your mortgage. With a Pension Plan Mortgage, you are provided with life assurance cover with monthly payments being made into a pension fund with tax free benefits.

A Pension Plan Mortgage is typically used by people who are self-employed and should only really be considered if you have consulted with a financial adviser.

Like Endowment and ISA mortgages, a Pension Plan Mortgage offers no guarantee of the mortgage being fully repaid using the tax free lump sum.

Until you reach the age of 50, you will not have access to the pension funds which effectively means you are unable to repay your mortgage until this time. So although, the Pension Plan Mortgage is tax efficient, it does not provide flexibility.