Put simply there are really only two types of mortgage capital and interest, or repayment, and interest only.

A capital and interest, or repayment mortgage is the simplest and safest way of taking out a mortgage. Under a repayment mortgage in the early years the amount repaid to the lender clears almost solely interest payable on the loan, very little of the money goes towards repayment of the capital. Once the mortgage has been running for a few years then more and more of the capital is repaid. Once a mortgage goes over its half way point then it is likely that more of the capital is being repaid and less interest. By simple calculation this means that at the end of the chosen term, which will for most first time buyers be 25 years, the mortgage is guaranteed to be repaid.

Insurances need to be effected and the most important are normally life assurance, income protection insurance and mortgage redundancy and sickness insurance.

Interest only

Interest only mortgages are exactly as they are described. Throughout the term of the mortgage the loan amount does not reduce because all that is being paid to the lender each month is the interest due on the loan. With these types of mortgages a repayment vehicle needs to be put in place in order that the outstanding capital sum at the end of the term can be cleared. Interest only mortgages are more suited to those who wish to take an element of risk on the repayment vehicle although it is the cheapest way to borrow the money.

Along side an interest only mortgage there are several different types of repayment vehicle that can be used. These include endowment policies, pension plans and Individual Savings Accounts. It is also possible to effect an interest only mortgage with no repayment vehicle provided that it is understood at outset that the money needs to be repaid at some stage. This may be suitable for those people who intend not to stay in the property forever however there is an element of risk in this approach in that should house prices fall, there may not be enough money to clear the loan.

Irrespective of whether or not a capital and interest or interest only mortgage is chosen, most UK mortgage lenders have a variety of mortgage schemes available to choose from.

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