Mortgage Advice

The vast majority of people buying property have to borrow money to do so. This loan, which is usually for a fixed period, is called a mortgage. In addition to paying the sum back every month, you have to pay interest on the loan.

As the mortgage lenders warn in the small print in their ads, if you cannot keep up the repayments you risk losing your home. So it is important that you fully understand what you are signing up for.

There are several types of mortgage available. The most common are:

Repayment mortgage The capital borrowed is repaid gradually over the period of the loan in monthly instalments together with an amount of interest. The amount of capital which is repaid gradually increases over the years but the amount of interest goes down.

Endowment mortgage Consists of two parts: the loan from the lender and an endowment policy taken out with an insurance company. You pay interest on the loan in monthly instalments to the lender but do not actually pay off any of the loan. The endowment policy is paid monthly to the insurance company. At the end of the period of the mortgage, the policy matures and produces a lump sum which should pay off the loan to the lender and may produce an additional lump sum. There is a risk that the endowment policy will not be worth enough to pay off the loan at the end of the mortgage period.

Interest-only mortgage Like an endowment mortgage, you pay interest on the loan in monthly instalments to the lender but do not actually pay off any of the loan. It is your responibility to pay off the actual loan in full at the end of the mortgage term.

Pension mortgage Mostly for self-employed people, the monthly payments consist of interest payments on the loan and contributions to a pension scheme. When the borrower retires, there is a lump sum to pay off the loan and a pension.

ISA mortgage With an ISA mortgage, you pay interest to the lender, and contributions to an Individual Savings Account (ISA) which should pay off the loan.

The list of lenders used to be fairly short just banks and building societies. Nowadays, you can also borrow from insurance companies, housebuilders who give loans on new-build homes, finance houses and specialised mortgage companies.

Some people use a broker to shop around for the best deal rather than going directly to the lenders. The broker will take all your personal details and try to find you a mortgage suiting your needs, for a fee. The Financial Services Authority has a help guide for people considering using a broker.


Mortgage rates

Whatever the type of mortgage, you will have to pay a rate of interest on the loan.

These are the main types of rates:

Variable rates This means you pay the going rate on your loan. Generally speaking, the mortgage rate changes every time interest rates change.

Fixed rates The interest rate is fixed for the period agreed often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall but you will face penalties if you try to quit, calculated according to how much time you have left on the fixed period.

Capped rates Fixed, but if rates fall you pay the lower rate.

Cash back deals This is when lenders offer money back if you take out a particular product.

Discounted rates You are offered a discount off the lender's variable rate. The rate paid will fluctuate in line with changes in the variable rate over a set term.

For general advice, visit the Financial Services Authority website help guide.