Mortgage Types

Essentially, there are two key types of mortgages: capital repayment and interest only. Once you’ve identified the way in which you want to repay the money lent to you, narrowing down the choice becomes much easier. It is then simply a case of finding the best deal for you.

Capital Repayment Mortgages

With capital repayment mortgages, you pay some interest and some capital off each month. Thus, the capital reduces throughout the duration of the loan: usually twenty five years.

The main benefit of having a capital repayment mortgage is that (provided you have kept up repayments) at the end of the term you are guaranteed to have paid off your mortgage. You can also choose how the interest is added to your loan.

One drawback of capital repayment mortgages is that your monthly repayments will generally be higher than interest only plans. There is also no potential investment windfall at the end.

Interest Only Mortgages

Interest only payments differ by the fact that all you pay the lender each months is the interest on the amount borrowed. At the end of the term you will need to have enough funds to pay back the amount borrowed. We recommend setting up a separate payment each month on top of the interest only repayments into a savings scheme to build up the sum of money to pay off the mortgage at the end of the term.

The benefits of interest only mortgages are that the monthly repayments are lower than capital repayment mortgages. Your investment may perform well, giving you surplus cash after paying off your mortgage.

The main drawback for interest only mortgages is that you are relying on your investments to perform well. It is up to you to check whether there is going to be enough money to pay off the capital amount at the end of the term. There are no guarantees that you will have enough money to do so.

As well as the two main types outlined above, there are a number of other mortgage types that may better fit your situation. Such as flexible mortgages and offset mortgages.