Below explains the different types of mortgage you can choose from and some of the terminology explained

Repayment Mortgage

A repayment mortgage is one where you pay off both the original loan and the interest on that loan via monthly payments to the lender.

At the start of the mortgage, your monthly payments consist of mainly paying the interest and only a small amount of the original loan. The further into the mortgage term you go, the more of the loan repayment gets paid off each month so you own more of the property.

Interest Only Mortgage

An interest-only mortgage is one where you only pay the interest on the loan month by month, and still owe the lender the whole of original sum borrowed until the end of the mortgage.Therefore, as well as a monthly payment to the lender, you make a second monthly payment into some sort of investment vehicle (such as an endowment, ISA, or pension). The idea is that at the end of the mortgage the investment vehicle contains a sufficient sum to pay off the original loan - possibly even a some left over.

Fixed Rate Mortgage

A fixed rate mortgage is one where the interest rate on the loan remains constant. In the UK mortgages can only usually be fixed for the first few years (e.g. up to 5). Mortgages which have a fixed rate for their entire term are common in other countries, but are only beginning to appear in the UK.

Capped Mortgage

A capped mortgage is one where the interest rate on the loan cannot rise above a certain level. In the UK a capped rate, like a fixed rate, is only usually available for the first few years of the mortgage.

Types of interest only mortgage

There are three main types of interest-only mortgage. It's worth bearing in mind that none of these is guaranteed to pay off the loan, and you need to keep a careful eye on the value of the fund and be prepared to top it up as necessary.

The first type of vehicle is an endowment. The major benefit is that the endowment also includes life cover, which therefore doesn't have to be arranged separately. The major problem with endowments is the charging structure: if you have to "close" the endowment early its value may be substantially less than the amount you have paid in.

The second vehicle is an ISA. ISAs are explained in greater depth elsewhere, but the key benefit is that the money you pay in grows free of tax (other than tax credits on dividends). The major disadvantage is one of lost opportunity - you can only pay in a certain amount to ISAs each year, and if you are using this to pay off your mortgage you are losing the ability to make tax-free savings.

The final way to pay off an interest-only mortgage, and by far the least common, is using a pension. Most forms of pension fund let you take 25% of their value as a tax-free lump sum at retirement. The idea behind pension mortgages is that you are paying off the loan not only using a fund which grows free of tax (like an ISA), but you are also effectively getting tax relief on your mortgage contributions as well. The problem is a distinct lack of flexibility, and the fact that you can't pay off the mortgage before retirement.