Your basic mortgage guide

When buying a home for the first time, the thought of finding a mortgage can be daunting. With the various different types available it can feel hard to decipher between each product. Here is a quick guide to help you decode the jargon when searching for a deal to suit you, along with the range of repayment options.

Types of mortgage

Tracker rate

The rates on a tracker mortgage will fluctuate in line with the Bank of England base rate. The link could be for a set period of time as opposed to the entire lifetime of the mortgage.

Fixed rate

A fixed rate mortgage is one where your interest payments are guaranteed to remain unchanged for a set period of time – normally the first three to five years of the loan, although some lenders offer longer fixed rate deals. After the specified time period has expired, the mortgage will usually be moved on to another rate, such as the tracker or the standard variable rate.

Standard variable rate

Standard variable rate loans will vary in accordance with your lender's mortgage rate. Although these rates tend to move in line with general interest rates, since they are at the lender's discretion, they may not move as far or as quickly.

Discounted rate

The interest rate on this sort of loan will fluctuate according to your lender's standard variable rate, but you will receive a discount for a set time period.

Capped-rate

During the 'capped rate period' specified with this sort of loan, the interest rate is guaranteed not to go above a fixed threshold. The advantage of this type of loan is that the loan rate can fall if rates drop.

Cash-back

Cash payments, normally between 6% and 8% of the loan, are given to borrowers when these loans are granted, to spend how they wish.

Payment Methods

Interest-Only

With this payment method, during the mortgage term, you only pay the interest on the loan, while the capital stays outstanding. In order to repay the capital at the end of the term, payments can be paid into a savings scheme. On some occasions, the loan is repaid from the money made from the sale of the property.

Offset

This type of payment can help to pay the mortgage off ahead of time since the loan is taken out together with a savings or current account, and while regular mortgage payments are required, cash from the other accounts help reduce the loan, consequently saving interest.

Repayment

This payment method is also called a capital and interest mortgage since part of the monthly payment goes towards paying the capital, while the rest pays the interest on the outstanding balance.

Endowment mortgage

In this case, an interest-only loan is combined with a life assurance with-profits policy which is intended to generate an amount which will clear the capital at the end of the term. However, the payouts from endowment policies are not guaranteed and at the current time, a lot of policies are expected to produce shortfalls.

Source: Times Online and the Council of Mortgage Lenders | Last updated: 15th December 2008

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