Choosing a mortgage is one of the most important decisions you'll make when buying property. At first glance mortgages can be a minefield of financial jargon - from tracker and fixed rate to APR - but looking at each mortgage type in turn will help you decide which is the best financial option for you.
Once you've found your dream house, you'll need to find the perfect mortgage to match. Mortgages come in a range of shapes and sizes, and will differ from lender to lender, so it's best to compare each mortgage type in turn. The first decision you'll need to make is how you intend to repay your mortgage.
Mortgage payment options
- Repayment mortgages
- Interest-only mortgages
This involves you repaying the money you've borrowed plus interest over an agreed period of time. If you have completed your payments, your mortgage will be paid at the end of this period.
These involve you covering the mortgage's incurred interest each month over an agreed period only. You are expected to invest money in savings or elsewhere which will eventually repay the money you've borrowed in a lump sum at the end of the mortgage period.
Types of mortgages
Once you have chosen how you'll repay your loan, you'll need to compare different types of mortgages available on the market. The main mortgages are summarised below.
- Fixed rate mortgages
- Variable mortgages
- Tracker mortgages
- Discount mortgages
- Capped mortgages
These mortgages involve paying a fixed rate of interest over a set period, regardless of interest rates rising or falling. This allows you to know how much your mortgage will cost each month.
Variable rate mortgages mean that your repayments could rise or fall depending on changes to your lender's standard rate of interest. Lenders may amend this if the base rate set on a monthly basis by the Bank of England increases or decreases. An interest rate rise means your mortgage repayments would go up.
The rate of interest for tracker mortgages mirrors a particular base rate, for example the Bank of England's base rate. Whenever the rate goes up or down, your mortgage's tracker rate will also change.
With these mortgages, a lender sets you a lower rate of interest for a restricted period at the beginning of the mortgage. Once this introductory period has expired, discount mortgages usually revert to the lender's standard variable rate.
Capped rate mortgages follow a variable rate of interest as set by the lender, but also offer a guarantee that you won't pay above a certain amount in any period if rates rise. Some capped mortgages also contain a 'collar', which sets the lowest rate you will pay as well.
Compare Mortgages
Compare different types of mortgages using an impartial mortgage comparison service. This allows you to search for deals on mortgages for all circumstances - from first time buyers to re-mortgages. You can select the type of mortgage you're interested in if you already know this, otherwise tick the 'don't mind' option and you'll see a list of results outlining the best mortgages available for your personal circumstances.
