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What type of mortgage – part I

There are so many different types of mortgage, and so many lenders, that it’s hard to where to start

Aaargh! Choosing a mortgage. It’s like choosing a mobile phone tariff. There are so many different types of mortgages on the market, and so many lenders, that it’s hard to know where to start.

Once you get down to it, though, you realise that there are three basic decisions you need to make.

First decision: will you go for a ‘repayment’ or ‘interest-only’ mortgage?

Repayment mortgages are the most popular. Part of your monthly payment covers the interest on the loan and the rest eats away at the capital (the actual amount you’ve borrowed). It means that at the end of 25 years (or whatever the length of the loan) you will actually own your home outright.
Interest-only mortgages are slightly cheaper than repayment ones as your monthly payments only pay the interest on the loan. This means that at the end of the term (length of the loan) you will still owe the amount you originally borrowed. This means that most people set up a separate payment each month into an investment vehicle that will grow as the mortgage continues.

Worryingly, though, many people now take out interest-only mortgages on their own without any investments to back them up. This makes you very vulnerable as property prices could go down at any time. They’re not necessarily going to keep on going up and you could find yourself suffering from negative equity (where the value of your house is less than the value of your mortgage).

Now you've decided how you want to pay your mortgage back, find out what you need to do next.

You can download our free mortgage guide for loads of useful information.

Jasmine and the Moneymagpie team
Moneymagpie Moneypedia
25.09.2008