At the same time as deciding what type of mortgage rate you want you also need to decide how you are going to repay the mortgage. Essentially you have two choices: Interest Only, and Capital and Interest (Repayment).
Interest Only
Monthly payments to the lender consist of interest only and the outstanding amount of the mortgage remains the same. This means that the monthly payments on this type of loan will be cheaper than the equivalent Capital and Interest mortgage.
However as you still have to repay the mortgage itself at some point, you may have to make payments into a separate investment in order to produce capital to do this. Common investments that can be used are Endowments, Individual Savings Accounts (ISA) or pensions.
Many choose this option if they intend to sell the property in the future to repay the debt or if they are likely to receive bonuses or an inheritance.Capital and Interest
Monthly payments are made up of an element of capital and some interest. During the early years most of each month's payments is interest and it is only later on that you start to repay any significant element of capital.
This is generally seen as less risky to the borrower due to the fact that as long as monthly repayments are maintained you are guaranteed to repay the loan at the end of the term.
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