Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it

The Two Main Types of Mortgage

REPAYMENT MORTGAGE
This is the most common type of mortgage today. This is the only method where you can be certain that at the end of the mortgage term the loan will have been fully paid off.

With this method, you make monthly payments to the lender over an agreed number of years. Most people choose a term of around 20 to 25 years for their first mortgage, but you can have a longer or shorter term. Your payments cover the interest on the loan and also gradually pay off the amount you borrowed (sometimes called the ‘capital’ or the ‘principal’). There is no built-in life cover with this method and you will need to take out a life assurance policy to cover the amount borrowed should you die during the mortgage term. MortgageFinders can help you with these arrangements and provide advice on a suitable product.

INTEREST ONLY MORTGAGE
This is the other type of mortgage and although it appears to be cheaper on the face of it, you are of course not paying off any of the loan. With this type of mortgage your monthly payments to the lender only cover the interest on the loan and the original loan remains outstanding. This is why you should usually pay separately into a savings scheme each month to build up a lump sum to pay off the loan at the end of the mortgage term, or sooner if you can afford it.

Split Interest only and Repayment:
Don’t forget that you can ‘mix and match’ by using a combination of interest only and repayment methods to repay a mortgage loan.

What particular Scheme should I have?
Once you have decided on which type of mortgage you want, you must then decide what type of interest rate or what type of scheme you need. There are hundreds of different schemes available, which is where MortgageFinders can really help you, but in essence they all fall into one of the following categories:

  • Fixed Rate mortgage.
  • Discounted variable rate mortgage
  • Tracker mortgage
  • Offset or current account mortgage
  • Other more specialist types of mortgage

See our  Frequently Asked Questions page for more detail about these different type of scheme.
 

Other things to consider

With an interest only mortgage the responsibility to repay the mortgage at the end of the term rests solely with the borrower, but this also gives you the flexibility to repay your loan in a way that suits your circumstances. You can use combinations of investments to provide the sum required or even include other financial provisions such as the proceeds from an inheritance or share options. 

It all depends upon what is appropriate for you - for example it may be that you intend to sell the house at a later date and trade down to a smaller property in which case the proceeds from the sale could be used to repay the loan. 

Please note that if you need advice on investments to repay an interest only mortgage you should seek independent advice.

Will it pay off my mortgage?
All interest only loans involve an element of risk in building up a sum of money to repay the loan or relying on receiving proceeds at a future date. With an interest only loan it is your responsibility to make sure you have enough money set aside to repay the loan in full at the end of its term.

Can I switch from interest only to repayment?       
Yes - many people start off with an interest only mortgage and switch it to a repayment type later. However please remember that this will extend the overall time that it takes to repay the loan and you are likely to incur costs in making the switch.

Never forget
With an interest only loan it is your responsibility to make sure you have enough money to repay the mortgage at the end of the term, otherwise you could lose you home.