Types of Mortgages

There are two types of mortgage:

  • Capital and Interest (repayment)
  • Interest-only.

A repayment mortgage is the most straightforward way of paying off the debt. Each month you make one payment, which is used to pay off the interest and some of the debt itself. As long as you keep up the payment over the term of the loan you are guaranteed to have paid off all your debts.

Interest-only - Borrowers pay off only the interest every month so they also need to consider how the capital sum will eventually be repaid. It may mean setting up a separate investment plan to pay off the capital owed at the end of the mortgage term.

An interest-only mortgage involves a substantial element of risk and it is important that anyone who takes one out understands exactly what they are getting into. The three most common investment plans that people have alongside an interest-only mortgage are endowments, pensions and ISAs.