Types of Mortgage

The most important decision you have to make when choosing a mortgage is how you will repay it. There are two major ways of doing this are the repayment mortgage and the much less popular interest-only mortgage. Which of these you choose depends to a large extent on your attitude to risk. The stability of your income and whether or not it may rise or fall over the foreseeable future is also consideration when deciding on a mortgage.

Repayment Mortgages

Also known as a 'capital and interest mortgage', this is one of the most popular types of repayment systems in the mortgage market. It is a risk-free way of making sure that you will own your home outright after the mortgage loan comes to an end. With this type of repayment method, part of your monthly mortgage payment is used to pay interest and part is used to pay back the capital you have borrowed, although in the first few years most of your monthly payment is interest. This means that you gradually pay off the loan and - providing you keep up your repayments - you are guaranteed to have repaid it in full by the end of your mortgage term.

The two most popular repayment options are loan terms of 30 years and 15 years. The longer 30 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 downside is the slightly higher interest rate.

Interest-Only Mortgages

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 alternatively, 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 if you expect your income to increase significantly over the interest-only period. When the payments go up at the end of the interest-only period, your increased income should cover the increase in the mortgage payment.

However, it's crucial to remember that with this type of mortgage, because you are only paying interest, your payments will not build equity in your home. If prices level off or decline, you may end up owing more on your mortgage than you can sell the property for.