Taking on a mortgage is a huge responsibility.  Because it’s usually the largest purchase you’ll make in a lifetime, it’s very important to find the right type of mortgage for your situation.

Although there are many types of mortgage, and each one may have different criteria and rates, in general there are only two ways to repay the loan: by repaying the capital and the interest together, or by paying the interest regularly across the lifetime of the loan and settling the capital sum at the end of the mortgage term.

Repayment mortgages

A repayment mortgage is made up of two parts: interest and capital. By regularly repaying portions of the capital you’ve borrowed, and paying back the interest on that loan at the same time, you’ll own your own home at the end of the mortgage term.  If you can afford it, a repayment mortgage is a more straightforward and less risky option than an interest-only product, but the monthly repayments are usually higher.

Interest-only mortgages

With interest-only mortgages you only repay the interest that’s built up and as a result, when the mortgage term ends, you’ll still owe the capital amount of the loan.  Lenders will want some reassurance that the loan can be repaid at the end of the mortgage period.

Monthly payments are lower than those of a capital repayment mortgage, and you’ll need to make plans to help you pay off the capital element of the loan, as well. 

Your IFA or mortgage adviser can explain your options in detail, when he or she proposes mortgage products that suit your individual circumstances.  If you think you’d like to take out an interest-only mortgage, an independent financial adviser (IFA) can help you discuss options such as using an ISA, a proportion of your pension, or an alternative investment to pay back the capital sum.

Question you might like to ask your mortgage adviser and IFA…

What kind of mortgage is best suited to my personal circumstances?

How much will I owe the lender at the end of the term and how will I cover that debt?

Will the amount I owe increase or decrease over time?

Are there penalty charges involved for repaying my mortgage early?