Choosing a mortgage

A mortgage is simply a loan taken over a long period of time to help you buy your home. Whether you get a mortgage from a bank, a building society or a specialist mortgage company, lenders usually offer between 75% and 95% of the price and expect you to pay the rest as a deposit  (although some lenders will offer 100% or in some cases, even more).

Sounds pretty straightforward so far, doesn’t it? It gets a bit more complicated when you look at the different kinds of mortgage on offer, but it really is important to get your head round them if you want to stand a chance of choosing the mortgage that will suit you best. So here they are:

Repayment mortgage

You make monthly repayments to your lender for a set period of time, (typically 25-35 years) until both the loan and the interest on it have been repaid.

Interest only mortgage

Your monthly repayments only cover the interest on your mortgage, not the amount of the mortgage itself. You also make payments into a savings plan such as an ISA, endowment or pension scheme, so that the mortgage can be paid off at the end of the agreed term with the money this has accumulated.

Endowment mortgage

One of the main types of interest only mortgage. An endowment is a life assurance savings scheme that pays out a lump sum at the end of the term. However, it is possible with this type of mortgage to end up with a shortfall – when the endowment does not make enough money to pay off the mortgage.

Variable interest rate mortgage

The rate of interest on your mortgage varies because it is affected by financial fluctuations such as the Bank of England's Base Rate, so your repayments go up and down – but how much they are affected depends on your lender.

Fixed rate mortgage

You pay a fixed rate of interest on your mortgage for an agreed period of time (anything from one year to five years or more), so you know exactly what you'll be paying each month. At the end of that time, you revert to paying a variable rate of interest.

Discount rate mortgage

You pay a discounted rate of interest for a set period. For example, with a 1% discount, your rate would still go up and down with the Base Rate, but you would pay 1% less than the standard rate. At the end of the agreed period, (usually one to two years) your mortgage repayments will go back up to the standard rate.

Capped rate

For a set period of time, your interest rate is ‘capped’ so that you know it will not rise over an agreed rate, although it may drop with the Base Rate.

Base rate tracker mortgage

The interest rate fluctuates with the Base Rate, and your repayments go up and down, without being influenced by the mortgage lender.

Offset mortgage

The money you have in your current and savings accounts are taking into consideration when your interest is worked out – but this is only worth doing if your other accounts are generally in a healthy state of credit.

Remortgage

You change your mortgage provider or the way you repay your mortgage, without moving house.

Self-employed mortgages

Most lenders now offer mortgages to people who are self-employed, although the deal you are offered will depend on the type of work you do. Often, self-employed mortgage lenders want to see three years’ of audited accounts. If your business is new, a self certified mortgage is available, although usually at higher interest rates than other self-employed mortgages.

Adverse credit mortgages

A range of mortgages are also available to people who have poor credit ratings, have been declared bankrupt or had other problems with debt. These mortgages usually involve a higher rate of interest than a regular mortgage, but come in a wide range of options, such as fixed, capped, trackers and discounts.

*Interesting Fact: When it comes to joint mortgages, women graduates are more likely to take out a mortgage with a partner, family member or friend. In a survey, 77% of women who graduated over the past ten years took out a joint mortgage, compared to 65% of male graduates.

How to choose the mortgage that’s right for you?

When it comes to choosing a mortgage, around 70% of people talk to a financial adviser or mortgage broker. Mortgage brokers have specialist knowledge of the market and can guide you through the enormous range of different deals and incentives. Do be aware though, that while some mortgage brokers are independent, others may be tied to specific lenders. The best way to find a mortgage broker is by word of mouth – ask your friends and colleagues if they have used a broker they would recommend.

 

*Scottish Widows Bank survey by What Mortgage website November 2007