Clarify your statement

By THIS IS MONEY
Updated:

 

I AM into my sixth year of a discounted mortgage with Alliance & Leicester. The three-year penalty period finishes next year. Why does my annual statement show that I still owe the £20,000 I borrowed nearly six years ago? Surely something must have been paid off the capital. I will be changing mortgages as soon as I can without a penalty and would like to know how I stand. MW, Poole.

David Hollingworth from mortgage brokers London & Country says: There are two ways to repay a mortgage. The first is on a repayment basis where you repay an element of capital and interest each month so that you are reducing the capital balance throughout the term until the mortgage is repaid at the end.

The second is on an interest-only basis where each monthly payment is made up of just interest. This means that the capital balance is not reduced at all and so borrowers make additional payments into some form of repayment vehicle.

This is usually an investment such as an endowment or Isa and the intention is that the investment grows sufficiently over the years to pay off the mortgage at the end of the term.

It sounds like your mortgage is on an interest-only basis, hence no reduction in the capital balance. It may well be that you have a repayment vehicle in place but it is important that you check this. You should also look into how well the investment is performing - by the nature of share-based investments there is no guarantee that it will be growing by the projected rate.

You are right to look for a better deal once your penalty has expired. If you don't have a repayment vehicle in place for your mortgage then you should think carefully and take further advice about how you want to repay the mortgage.

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