Buyers Guide - Mortgage Types

The basic decision you have to make is how you're going to repay the money you've borrowed. Don't be confused - there are only two basic types of mortgage:

• repayment, where the capital is re-paid gradually over the term of the mortgage
• interest only, which, as the name suggests, is where you only pay the monthly interest of the mortgage. However, your lender will stipulate that you set up a repayment vehicle, such as an ISA, an endowment policy, or a pension plan which, when it matures, can be used to pay off the outstanding debt. If you take out this type of mortgage, check regularly that you're on target to pay off the mortgage when it's due. If not, then increase your savings.

By taking a 100 per cent deal on a repayment basis, first-time buyers can begin to repay modest amounts of capital almost immediately. Choosing a deal that allows overpayments to be made without penalty can also accelerate the amount of capital that's repaid.

A good 100 per cent mortgage can offer a viable solution for some, although borrowers should try to avoid the mortgage indemnity premium (MIG). If you have no, or only a small sum to put down, a lender may charge you this premium in order to cover himself in case you're unable to keep up the repayments. On a 100 percent mortgage, MIG usually works out as an additional cost of about three per cent of the amount borrowed, increasing the overall borrowing to 103 per cent. It could be cheaper to find a loan that does not require this.