Mortgage Guide

Mortgages are an important part of buying a new property. However, whether you already have a mortgage, or you're a first-time buyer, the sheer number of deals available could leave you a little confused. So much choice is good because it means you are more likely to get a mortgage suited especially to your needs.

There are many types of mortgage and before you can decide on the right one, though, you need to know the differences between the many types available.

When you take out a mortgage there are two key decisions you have to make:

• What rate of interest will I pay?
• How do I repay the loan?

Put simply, a mortgage is a loan secured against property and when choosing the rate of interest you pay, you'll need to consider the two basic types available. The first is a variable rate and is offered by just about every lender.

The second type is harder to categorise but generally these mortgages offer deals over a limited period. There is a wide choice of packages including fixed rate loans, capped rate and flexible mortgages.

Once you've decided to take out a mortgage, think about the different methods of paying interest on the loan.

Borrowers who choose a variable rate mortgage pay the lender's standard variable rate (SVR) of interest. Opt for a lower interest rate package offered as a special deal by your lender and the payments usually revert to the SVR once the agreed period is over. The SVR is normally between two and three percent above the base rate set by the Bank of your country. Lenders can raise or reduce the SVR in line with any changes in the base rate. It is usually possible to pay a lower rate of interest by opting for a special deal.

How interest is calculated

With standard mortgages, most banks and building societies calculate your interest payments on an annual basis. At the end of each year, your mortgage balance is assessed and used to set the interest payments. This method takes no account of the fact that over the next 12 months you might reduce the amount you owe.

Daily or monthly interest mortgages calculate the interest chargeable more frequently, so you pay less interest and can reduce your mortgage balance more quickly. This reduces the amount of interest payable over the life of the loan still further.

Most lenders have special products that work on this basis, but this is the exception rather than the rule, so check in advance.

There are a wide variety of options around, all you need to do is decide which one suits you best. Although some deals are exclusive to first-time buyers, many lenders will offer special deals to those looking to remortgage (that is, move their mortgage to a new lender without moving house) or those moving home.

When taking out a new loan, think about asking the lender if they will offer special rates in future. Deals include:

• Fixed rates mortgages - are suitable for those who prefer to know exactly what their monthly outgoings will be. These types of mortgage allow a set rate of interest at a certain percentage for an agreed period. Generally speaking, the most attractive rates are offered for short-term fixed rate loans and the less attractive rates are for longer-term fixed rate loans.
  Remember, if interest rates fall, you may miss out on a cut in your monthly payments. If you decide to repay your mortgage during the fixed rate period you will have to pay an early redemption penalty.
  At the end of the fixed rate period your mortgage will normally revert to the SVR unless you approach your lender for another special deal or decide to re-mortgage elsewhere.
  
• Discounted rates - these give borrowers a discount off the lender's standard variable rate (SVR) for a set period. The rate you pay moves up or down in line with any changes to the SVR. When the discounted period ends, you normally revert to paying the SVR.
  This type of loan is cheaper in the beginning and allows you to take advantage of any interest rate cuts. But if interest rates rise, your monthly payments go up.Discounted mortgages usually have early redemption penalty charges during the discounted period and these may extend beyond the discounted period if the loan is particularly cheap.
  
• Capped rates - These combine the best features of fixed and discounted mortgages. The top rate you pay is fixed or 'capped' at a certain level for a set period. If interest rates fall during that time, your monthly payments should fall in line with any changes to the lender's SVR. This makes capped mortgages suitable for someone on a limited budget, enabling them to benefit from interest rate falls but protecting them from any rises.
  However, like fixed and discounted mortgages, their terms also usually include charges for early repayment, often called early redemption charges (ERCs).
  
• Cash-back mortgages - Great for first-time buyers, those on a tight budget, or those who have taken out a loan to use as a deposit for the mortgage. Once the deal is done, your lender will reimburse a certain proportion of your mortgage loan. This could be as much as a couple of thousand pounds, depending on the lender and the size of the mortgage.
  Cashbacks were previously available only on variable rate mortgages but can now also be taken out in conjunction with any of the other special deals. The downside is that, by taking the cashback, the rate of interest you pay is likely to be less attractive than a non-cashback loan. If you repay part of the loan or redeem it in full during an initial period, you may well be asked to pay back some or all of the cashback payment.
• Flexible mortgages - These are a new wave of mortgages specially designed to accommodate the changes taking place in our working environment and lifestyles.
  Some mortgages allow you to take payment 'holidays' where you can choose not to make monthly payments for up to six months. This is particularly useful for couples starting a family, or people taking time out to study.
  You will have to agree payment holidays with your lender and taking time off could either increase your repayments later on or prolong your loan period.
  Some companies allow you to pay off lump sums against your mortgage without charge. This facility is particularly useful for the self-employed and contractors whose incomes may fluctuate.