There are two basic styles of mortgage – ‘Repayment’ and ‘Interest Only’.

1. Repayment Mortgages

   With a repayment mortgage, your monthly payments to the lender go towards reducing the amount you owe as well as repaying the interest they charge. This means that each month you’re paying off a small part of your mortgage loan.

   The advantages: It’s a clear approach – you can see your mortgage getting smaller and, provided you maintain the required payments, you also have the certainty that your mortgage will be repaid at the end of the term.

   The disadvantages: Initially, the majority of your payments go towards interest on your mortgage, which means that, in the early years, the amount you owe won’t reduce by very much.

2. Interest Only Mortgages

   With an interest only mortgage your monthly payments pay only the interest charged on your loan, so you’re not actually reducing the loan itself. You’ll need to have some other arrangement or plan in place to repay your loan at the end of the term. For example - investments, savings plan, downsizing (where you sell your property and buy a cheaper one using the equity to repay your loan), making lump sum payments or changing to a repayment mortgage.

   The advantages: If the savings or investment plan you choose performs well, then you could pay off your mortgage earlier compared to a repayment mortgage. At the end of your mortgage term there may be a lump sum available after the mortgage has been repaid.

   The disadvantages: Very few investments or savings plans are guaranteed to repay your mortgage in full. At the end of the mortgage term, you are responsible for repaying the mortgage in full. If your savings or investment plan doesn’t cover the full amount, you’ll be responsible for paying the difference. Your mortgage lender can demand repayment, and they’ll charge you interest on any outstanding balance until it’s repaid.

   Lump sum payments or changing to a repayment mortgage may not be possible if your circumstances change and you can no longer afford the increased amounts. Downsizing is not a guaranteed method of repaying your loan as, even if you have enough equity now, house prices could fall and may leave insufficient equity to repay the loan. It is not advisable to rely on house prices increasing as this might not happen.

   Some people may hope to rely on a future inheritance. However, there are several risks associated with this. For example, people can change their wills and, therefore, your inheritance is not guaranteed. The amount you receive may be different to what you expect or you may not have inherited by the time your mortgage term ends, and there can be a delay in receiving funds from an estate.

3. Combination Mortgage

   It may be suitable for you to pay your mortgage by a combination of repayment and interest only.

Lists of links to other pages

• What is a Mortgage

  Put simply, a mortgage is just a loan but with a key difference that it’s secured against your home. This means that if you don’t keep up your mortgage payments, your lender may be able to sell your home to recover the money you owe.

  

• How much can I borrow

  How much you can borrow depends on several factors. You should find out how much you can borrow before making an offer on a property.

  

• A Guide to Mortgage Types

  We understand that buying a home is a big step and one of the biggest financial decisions you’ll make in your life, and can seem a daunting and complicated process. Through this online guide, we hope we can help you find your way through the maze.

  

• The Cost of Buying your Home

  Just what costs are involved when moving home?