There are four basic types of mortgage (for clarity, these descriptions assume interest rates do not change):

• Table mortgage: This is the most common form. The repayments do not alter over the life of the mortgage. At the beginning, most of each repayment is interest, by the end you're mostly repaying principal.
  
  
• Revolving-credit facility: This is a large overdraft secured by your house, which you usually access using a cheque account. Some lenders put a diminishing credit limit on the facility to make sure you reduce the debt over time.
  
  
• Reducing mortgage: On each repayment, you repay the same amount of principal. This reduces the interest charge each time, so each repayment is less than the previous one.
  
  
• Interest-only mortgages: These are becoming popular as a means of offsetting high house prices. When you pay interest only, monthly repayments are financially more digestible. But you'll have to start paying off the mortgage at some point. And, unless house prices head upwards, you're not building up equity in your home. The risk is that if property prices fall, your property will be worth less than what you paid for it. If you have to sell, you could end up deeper in debt.

Interest-rate options

There are two main types of interest-rate (and two hybrids):

• Floating: The lender can change the interest rate on the mortgage whenever they choose. A floating-rate mortgage offers you wide scope to change your plans too. You can make extra repayments, increase or decrease repayments (subject to some limits), or repay the mortgage early, without copping penalty fees.
  
  
• Fixed: The lender cannot change the interest rate for a certain period, such as a year. This gives you certainty, and floating rates are usually higher than fixed rates prevailing at the same time. This explains why fixed-rate mortgages are very popular these days. But with a fixed-rate mortgage you will often face a penalty if you want to change the conditions.
  
  
• Capped: A compromise is a capped rate. If floating rates rise above the cap, the cap doesn't follow, but if floating rates drop below the cap, the capped rate drops too.
  
  
• Discounted rate: Another alternative to a fixed-rate deal is to have a discounted rate. This guarantees you stay below the floating rate - whichever way it moves - for the length of the discount, provided you have all of your loan in it.

See our Mortgage strategies report for more on the pros and cons of different mortgage-type and interest rate options.