This is also sometimes known as a 'capital and interest mortgage' and is one of the most popular types of repayment systems in the mortgage market. Each monthly repayment is made up of part interest and part capital payments. Initially your monthly repayment consists of mostly interest but as each payment chips away at the capital, thereby attracting less interest, towards the end of the loan term you'll find that you're paying very little interest and that the repayments are mostly capital. In this way, although the repayments may be higher than if you had an interest only mortgage you are at least certain that at the end of the loan term your mortgage will be paid off.
The two most popular options are loan terms of 30 years and 15 years. The longer term will require you to pay much more money in interest over the course of the loan, but the monthly payments will be somewhat smaller. There may also be some tax benefits to paying mortgage interest. Although the interest rate will be slightly lower for a 15-year mortgage, the monthly payments will be higher. If there are no pre-payment penalties, you may want to opt for the longer term and then make payments as if it was a 15-year mortgage. This allows for the flexibility of reducing payments when necessary and the benefits of paying off the mortgage faster. The only downside is the slightly higher interest rate.
This is a type of mortgage that involves monthly repayments of interest on the mortgage but none of the capital for a certain fixed period. At the end of the interest-only period, the mortgage may convert to a traditional fixed-rate mortgage payable over the remaining period of a 30-year term, or the entire balance of the mortgage must be repaid.
This type of mortgage could be a good idea if you know that you will only be in your home for a short period of time, or for those who expect their income to increase significantly over the interest-only period. When the payments go up at the end of the interest-only period, their increased income should cover the increase in the mortgage payment.
However, it's important to remember that with this type of mortgage, because you are only paying interest, your payments will not build equity in your home. Although, increasing property prices have historically provided a significant portion of a homeowner's equity, increases in house prices are not guaranteed. If prices level off or decline, you may end up owing more on your mortgage than you can sell the property for.