Standard Mortgage Types

The most important decision you have to make when choosing a mortgage is how you will repay it. There are two ways of doing this. Which of these you choose depends to a large extent on your attitude to risk. The stability of your income and whether or not it may rise or fall over the foreseeable future is also consideration when deciding on a mortgage.

Repayment Mortgages

The repayment mortgage - sometimes called the capital repayment mortgage - is the only risk-free way of making sure that you (rather then your lender) will own your home after the mortgage comes to an end. With this type of repayment method, part of your monthly mortgage payment is used to pay interest and part is used to pay back the capital you have borrowed, although in the first few years most of your monthly payment is interest. This means that you gradually pay off the loan and - providing you keep up your repayments - you are guaranteed to have repaid it in full by the end of your mortgage term. If you don't want to take any chances with your mortgage, this is the repayment method to go for.

Interest-Only Mortgages

More risky than a repayment mortgage, as there is no guarantee that you will pay off the loan and so own your home when the mortgage comes to an end. This is because, instead of paying back the loan little by little, the whole of your monthly mortgage payment is made up of interest. None of the capital you have borrowed is paid back into the end of the mortgage term, when you will be expected to pay off the entire loan in one go.

To ensure that you have a sufficiently large lump sum to be able to do this, you should make payments into some kind of savings plan to back up your mortgage, as well as making the normal mortgage payments. The risk you take is that the savings plan may not produce the lump sum you need to repay the mortgage, although if your investments do exceptionally well you could end up with more than you need to clear your mortgage debt.