Choosing a Mortgage

Repayment mortgage

With a repayment mortgage you make monthly repayments for an agreed period (the 'term') until you've paid back the loan and the interest. In other words, every month, your payments to the lender go towards reducing the amount you owe as well as paying the interest they charge. So each month you're paying off a small part of your mortgage. Simplicity is the advantage - you can see your loan getting smaller. Disadvantage is that in the early years your payments will be mainly interest. If you wanted to repay the mortgage or move house in the early years, you would find that the amount you owe wouldn't have gone down by very much.

Interest only mortgage

With an interest only mortgage you make monthly repayments for an agreed period but these will only cover the interest on your loan (endowment mortgages work in this way). You're not actually reducing the loan itself. This is why it's very important for you to arrange some other way of repaying the loan at the end of the term (investment or savings plan). If you choose this option you will need to check that your investment grows accordingly, so that at the end of the term you'll have enough money to pay off the loan. If it doesn't grow as planned, you will have a shortfall and you'll need to think about ways of making this up. The advantage of interest-only repayments is that your monthly payments will be lower. Anyway the most difficult part of this deal is that debt is not going to go away. Throughout the life of the mortgage, you'll need to keep your investment's return high enough to repay your loan at the end of the term. If you can't repay it at the end of the term you could lose your home.