The first decision you will have to make when shopping for mortgages is whether you will use an interest only mortgage or repayment mortgage. These two types of mortgages basically make up the overall mortgage market and mortgages are further sub-divided between these two categories.
In an interest only mortgage, your monthly mortgage payments basically cover the interest of your loan. At the end of the term of your mortgage, normally 25 years, you will be left to repay the principal amount of your mortgage to the lender. On the other hand, with repayment mortgages, your monthly mortgage payments will cover both the interest and principal payments of your mortgage. At the end of the term of your mortgage, you will have repaid the loan in its entirety and you will be the outright owner of your home.
Repayment mortgages are simple and straightforward and that is what makes them attractive to borrowers. There is no need to make additional monthly investments to cover the balloon payment of the principal at the end of the term, like with an interest only mortgage.
Another advantage is that in most repayment mortgages, the initial monthly payments are low and thus are very popular with first time homebuyers. Although in most cases no other repayment vehicle is required by the lender for a borrower taking out a repayment mortgage, many lenders will require life insurance to cover the entire amount of the loan, in the case of the death of the borrower. This is standard practice among mortgage lenders.
The only drawback to the repayment mortgage is that potentially every spare bit of money you have will be tied up in your mortgage and go towards repaying your mortgage. You are thus not able to tap the stock market or other investment opportunities to make your money grow for you. However, repayment mortgages are regarded as a safe option and appeal to the more cautious borrower.