What is a mortgage?

A mortgage is a loan you take out to buy property. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. If you change lenders but don't move home it's referred to as a 'remortgage'.

You can get a mortgage direct from the lender (banks, building societies and specialist mortgage lenders), or you can use a mortgage broker.

The two main ways to repay your mortgage are 'repayment' and 'interest only'. With a repayment mortgage you make monthly repayments for an agreed period (the 'term') until you've paid back the loan and the interest.

With an interest only mortgage you make monthly repayments for an agreed period but these will only cover the interest on your loan. You'll normally also have to pay into another savings or investment plan that'll hopefully pay off the loan at the end of the term.

Some mortgages offer you options to vary your monthly payments, or to combine your mortgage account with savings and other income - these are called flexible, current account and 'offset' mortgages.

You'll also find a range of interest rates to choose from. For example, 'variable' and 'tracker' rates change in line with Bank of England rates, 'fixed' rates are fixed for a set number of years, and 'capped' rates have a variable interest rate with a ceiling so your payments won't go above a set amount.

A lender may require you to take out life insurance to pay off your mortgage should you die.  You can also get insurance to protect your income or just your mortgage payments if you become ill or disabled, or lose your job.

A repayment mortgage is paid back over a set number of years with interest. Each month you would repay part-capital and part-interest. The interest element is larger in the initial years.

As the mortgage reduces steadily over the years, the amount of interest payable also decreases. Therefore, over time, your monthly repayment will consist of an increasing amount of capital and a decreasing amount of interest.

Tax relief applies only to interest repayments. This means that, with a repayment mortgage, tax relief will decrease over time.

First time buyers can take out a Low Start Capital Repayment Mortgages. This mortgage consists of interest-only repayment for an initial period, followed by a gradual increase in capital repayment. The initial lower repayments mean higher payments later on.

You can make lump sum payments off your capital and need to change your payments when interest rates change

Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.

Interest only mortgage

With an interest only mortgage you make monthly repayments for an agreed period but this will only cover the interest on your loan. You'll normally also have to pay into another savings or investment plan that'll hopefully pay off the loan at the end of the term.

This means you will need to make a separate payment to some form of savings plan, so you can build up a lump sum to pay off the mortgage at the end of the term. There are three main types of savings plans, for example: endowment policies, ISAs or pension plans, for example: endowment policies, ISAs or pension plans. Its very important to keep up payments as otherwise the funds available to repay the loan are likely to be insufficient. This may mean your home could be at risk. Its important to remember that its your responsibility to ensure that an adequate repayment method is in place.

An Endowment Mortgage is the simplest type of mortgage. It consists of a monthly payment made up of:

The interest on the loan and a monthly contribution to an endowment (life assurance) policy.

The loan itself is paid off in one lump sum with the proceeds of the life assurance policy.

During periods of low interest rates, there may even be a surplus left from the policy after paying off your mortgage, although this is not guaranteed.

The benefit of life assurance cover is included, (this will ensure that the mortgage is paid off in the event of premature death during the mortgage term), and you might also receive a lump sum at the end of the mortgage term.

These are now being bundled into all-inclusive mortgage packages.

Like endowment policies you can pay off your mortgage early and possibly generate a tax-free lump sum if the ISA performs better than expected.

The current state of the equity market needs to be considered.

If you have a personal pension scheme, a Pension Mortgage may be an appropriate option. A pension mortgage is similar to an Endowment Mortgage except that contributions are made into a pension scheme rather than a life assurance policy. Each month, you pay the interest on the loan plus a contribution to your personal pension scheme. The lump sum generated by your pension scheme is then used to pay of the whole mortgage. The main advantages are all three payments are tax free.

You will also need to have a separate life assurance policy to cover you in case you die before retiring.

Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.

With a current account mortgage, all your accounts - savings, mortgage, current account and even loans and credit cards - are pooled. You have a single cheque book and a debit card.

There are no monthly repayments to reduce your debt.

Instead, any money paid into this one account reduces the amount you owe (lenders normally stipulate that you pay your salary into the account).

All borrowing is charged at the mortgage interest rate, which is lower than personal loan rates and credit card rates and overdraft charges.

Interest is calculated daily, so every day your current and savings accounts are in credit - the interest on your mortgage will be reduced.

This could mean paying your mortgage off early.

The interest is calculated on the difference between the combined balance of your current and savings accounts and your mortgage balances.

This is when the terms of the original mortgage are renegotiated, and usually means that the borrower increases the amount that they are borrowing, which is often possible due to a rise in the value of the property. A remortgage may allow the homeowner to repay other debts such as personal loans or credit cards, or it may be a way of paying for home improvements such as a conservatory a loft conversion.

With a remortgage you could pay-off all your existing commitments, HP, those bad credit card bills - and get the bank manager off your back at the same time! Just imagine how much less of a problem life would be with just one low manageable monthly repayment with a remortgage.

Libor Mortgage

Libor mortgage like the majority of mortgages on the market track a rate.

Unlike the majority of mortgages that track the Bank of England base rate, Libor mortgage track the London Inter Bank Rate.

These lenders mainly sub-prime and self-cert lenders track LIBOR (the London Inter-Bank Offered Rate), the rate at which banks lend money to each other in the money markets.

Most LIBOR mortgages track three month LIBOR.

Offset mortgages work in a similar way to current account mortgages, except that your separate accounts are linked rather than completely amalgamated.

You can still use your savings to reduce your debts.

There are no monthly repayments to reduce your debt.

Instead, any money paid into this one account reduces the amount you owe (lenders normally stipulate that you pay your salary into the account).

All borrowing is charged at the mortgage interest rate, which is lower than personal loan rates and credit card rates and overdraft charges.

Interest is calculated daily, so every day your current and savings accounts are in credit - the interest on your mortgage will be reduced.

This could mean paying your mortgage off early.

The interest is calculated on the difference between the combined balance of your current and savings accounts and your mortgage balances.

Fixed Rate Mortgage

With a fixed rate mortgage the monthly repayment amount is fixed for a specified period irrespective of changes to the Bank of England's base rate or the lenders standard variable rate.
Fixed rate mortgage schemes generally last two to five years, although longer terms are available. At the end of the fixed rate the interest rate reverts to the lenders standard variable rate. A fee called an early redemption penalty would apply if you chose to cancel your fixed rate mortgage within the fixed rate period.

Flexible rate mortgage schemes allow you to overpay and underpay without redemption penalties being charged. You can tailor your current financial situation to the mortgage payments that you make. When you have spare cash you can overpay and if necessary you can underpay, skip a mortgage payment or even borrow money against the capital repaid.

Not all flexible mortgages are the same. Some will restrict how much you can overpay during a set period, others will only allow minimum amounts and some will allow a maximum amount per month.

Restrictions can also apply to borrowing against the capital already repaid. In fact, some mortgages labeled as flexible do not allow you to borrow any money against your mortgage. If borrowing is permitted you should check how easy it is to access the cash you require.

A variable rate mortgage is based on the lenders standard variable rate.
The lenders standard variable rate is generally affected by movement within the Bank of England's base rate. Standard variable rates vary from lender to lender but are typically 1.5%– 3.5% above the bank of England base rate.

The interest rate charged will go up and down, broadly in line with interest rates in the economy as a whole, during the lifetime of your mortgage. Basically this means that when the interest rate goes up, the amount ou have to pay also goes up. Similarly, when the interest rate falls, your payments come down. Some lenders offer a way of levelling out interest rate changes over a year. The interest rate charged goes up and down in exactly the same way, but it does make it easier to budget for the year ahead. Variable rate mortgages may incur early repayment charges, but we will of course advise you of these details if applicable.

With these deals you get a cash lump sum as well as the loan when you take out the mortgage. You're usually tied into the variable rate for a set period.

A Discounted Variable Rate Mortgage has an interest rate where a discount is applied to the lenders standard variable rate for a set period. As the lenders standard variable rate moves up or down the discounted rate moves up or down by the same amount.

Discounted rate mortgages are often offered for a set period of time usually two years, though some mortgage lenders now offer discounted rates up to 3 and 5 years.

When you compare discounted rate mortgages it is important to check that the cheap discounted rate mortgages do not have an extended redemption penalty period. Extended redemption periods prevent you from the flexibility of changing you mortgage without being charged a redemption penalty. They also could tie you to the mortgage lenders variable rate for a number of years after the discounted rate period ends.

Tracker rate mortgage schemes follow movement in the Bank of England base rate at an agreed differential.
The Tracker rate mortgage is available for a fixed period or the life time of the loan. The most common tracker rate period is 2 years, though mortgage lenders now offer 3 year, 5 year and even 10 year track rate mortgages.

If the tracker rate is for a set period of time the mortgage will revert to the lenders standard variable rate at the end of the tracker rate period.