Step 2: Choosing how you repay the mortgage
Now you've found how much you can borrow, you'll need to decide how to repay your mortgage. You are going to have to repay your mortgage over quite a long time. There are two ways of doing this - repayment or interest-only.

Repayment
These are the most popular type of mortgage. With these mortgages, your monthly payments repay both the interest owed, plus a small amount of the capital (the amount you have borrowed) until the mortgage is paid off in full.

Key pros and cons of repayment

Pros

• Simple and easy to understand.

Cons

• At the end of the term your mortgage is repaid in full. With some repayment mortgages, the amount you owe (and so the amount on which you pay interest) is worked out just once a year, and how much you pay off each month over the year is not taken into account. So as a result, you're charged interest on money you've already paid off. This is less common now but it is worth checking to make sure.

How is the monthly interest worked out?
Each month you repay part of the debt and pay interest on the amount of the mortgage left. At the start, your mortgage debt never seems to change, as most of your monthly payment covers the interest building up on your mortgage. But towards the end of the term a bigger percentage of your payments go to repaying the capital, (the amount you originally borrowed) and you'll see the size of your loan shrink more quickly.

Interest-only
With an interest-only mortgage, your monthly payments cover the interest on the mortgage, but not the capital (the amount you originally borrowed). So at the end of the mortgage term, the amount of the original mortgage must be repaid. To make sure you can pay this off, you put extra funds in investments. The idea is that these investments make enough money to repay the mortgage at the end of the term. But because you are playing the stock market, which can go up or down, there are no guarantees you'll make enough.

There are a range of different ways you can invest your money to build up enough to make the final payment like endowment policies, tax-free Individual Savings Accounts (ISAs) and tax-efficient pension plans. You should speak to an Independent Financial Adviser (IFA) for help on what's right for you. These are independent experts who are authorised to sell or advise on the policies offered by insurance companies, as well as other financial service providers, such as banks and building societies. You'll find details of your local IFA in the Yellow pages (www.yell.co.uk), or visit www.unbiased.co.uk.

Endowment policies used to be a popular way to build up funds to repay the capital of interest-only mortgages. However, some people have found these policies haven't built up enough money to pay off the full mortgage amount at the end of the mortgage term. To find out more, visit our endowments section.

Key pros and cons of interest-only

Pros

• If your investment does well on the stock market, you may have enough to pay off your mortgage and have a lump sum left over-but it's by no means guaranteed.
• Your investment can go with you when you move or re-mortgage your home.

Cons

• It is risky. There are no guarantees your investment will grow sufficiently to repay your loan. If the investment does not do well, you may have to pay more into it to cover your mortgage debt, or be left with some of the mortgage to repay at the end.

How is the monthly interest worked out?
You pay interest on the amount you owe (the capital). As the amount you owe does not vary, your monthly payments will only change if interest rates change. This means you owe as much after 25 years as you did at the start. In the meantime, however, your investments should have grown enough to cover the mortgage debt - but remember this is not guaranteed.

Once you've decided if you want a repayment or interest-only mortgage, you are ready for step three choosing a mortgage type.