Mortgages are simply big loans that you take out with the express purpose of buying property – normally a house or flat. The range of mortgage products available is quite substantial and it helps to have some knowledge of the different types of mortgage and what they will mean to your finances before signing on the dotted line.

The Basic Types of Mortgage

There are two main types of mortgage to choose from:

1. Repayment mortgages in which a small percentage of each monthly payment is used to reduce the capital while the rest pays the interest for the month,
2. Interest-only mortgages which involve you paying off the interest on the loan but not the actual capital.

At the end of the mortgage term, a repayment mortgage will see you with no debt however with an interest-only mortgage you’ll be expected to pay the capital that you originally borrowed. There are various ways to do this with the most popular being the addition of an endowment policy to your mortgage. An endowment is an insurance policy that pays out a lump sum at the end of its terms however they can be unpredictable and a lot of home buyers in the past have been left with less money in their endowment fund than they need to pay off their mortgage loan.

Once you have chosen the type of mortgage for you then you need to look at the type of interest deal you want to have as well. The interest rate you are charged when you take out a mortgage is based on the Bank of England’s base rate. This rate is reviewed monthly and can go up as well as down. There are three main deals with regards to interest:

• Variable rates mean that you pay the going rate of interest on your mortgage loan. So for example, if the base rate increases then so will your payments however if it falls again then so will your payments. Most people start their mortgage with one of the other deals however virtually every mortgage changes to a variable rate at some point.
• Fixed rate mortgages have their interest rates frozen for an agreed period of time. The time frame chosen is normally between two and five years and there is often a penalty attached should you choose to change lender before the fixed rate period ends. Saying this, the fixed rate means that you can easily budget as you know exactly how much you’ll be paying each month plus you know that should the interest rates increase (as they have been known to do of late) you won’t be required to pay any more each month. On the down side though, should the interest rate fall, you’ll still have to pay the higher amount because of the fact that it’s fixed.
• Discounted Rates are normally offered to new borrowers and apply to the first two or three years of your mortgage. The discounted rate mortgage allows you to pay less than the lender’s variable rate however when the discount period comes to an end the interest rate often shoots up to a much higher rate. These mortgages can save you a large sum of money over the first few years but it is important to change mortgage providers – possibly to another lender who is offering a discounted rate – before the low interest period comes to an end.

Obviously this is just a simple overview of the types of mortgages and interest rate deals that are on offer from most lenders. The best one for you will depend on your personal circumstances and it might be worth talking to a qualified financial advisor for more information.