We hope this guide will help give you some idea of the decisions you will need to make on your mortgage, but would stress that this a guide rather than a gospel. We would urge you to contact us before you make any concrete decisions on your mortgage. Many of the mortgage types outlined below can be “mixed and matched”, and you may find this more suitable for your needs. Only by sitting with a consultant and discussing your needs in detail can you be sure that you’re making the right decision.

How to pay back the money you borrow

Broadly speaking, there are two ways of paying back the money you are borrowing from the mortgage lender.

Repayment Mortgage

• You will be paying both the interest on the amount you have borrowed, as well as paying the amount borrowed back. In the early years of your mortgage, it will be predominantly interest that you are paying, with the capital reducing slowly. Later on in your mortgage, the capital is repaid at a greater and greater rate until eventually your mortgage payments consist almost entirely of capital.

• Providing you maintain your monthly mortgage payments, you are assured of paying off all of the money you owe to the lender by the end of your mortgage term

Interest Only Mortgage

• Widely recognised as being the riskier of the two options, with an interest only mortgage you pay only the interest on the amount that you have borrowed.

• While this means your monthly payments are lower than with a repayment mortgage, it also means that you will still owe the lender the same amount you have borrowed when your mortgage comes to an end.

• It is the borrower’s responsibility to ensure they have the same sum of money they borrowed ready to pay back the lender when their mortgage comes to an end.

• The risk element comes from having no guarantee that you will be able to pay this amount off. There are many ways of raising capital to pay an Interest Only mortgage off; a pension, an endowment, an ISA, or equity in the property you are buying or living in are just a few examples. But all of these “repayment strategies”, as they are known, come with their own risks.

Click on the icon to the right for more information on ways of repaying your mortgage from the website of the financial services industry watchdog, the Financial Services Authority (FSA).

How to determine the rate of interest you pay

Again, broadly speaking there are several different “rate” or “product” types, many of which you may well have heard of already. They are:

Standard Variable rate

This is the rate that over half of UK mortgage holders are paying. All lenders have a “Standard Variable Rate” (SVR) although some have different names for it. This is the basic lending rate that lenders apply to the majority of their customers. This rate will fluctuate at the lenders own discretion, and although it tends to move up and down broadly in line with the Bank of England base interest rate which is announced monthly, this is not always the case. This means that borrowers on SVR are effectively at the mercy of their lender's decisions regarding monthly rate policy and, by staying on SVR, are probably paying far more than they need to when generally they are free to switch lenders to find a better deal.. Nearly all lenders will offer a lower introductory rate when you first take out your mortgage, making SVR mortgages impractical- see below.

Fixed rate

A fixed rate does pretty much what it says on the tin! You pay a pre-agreed interest rate on your monthly payments for a specified period, usually between 2 and 5 years. Regardless of whether any other interest rates go up or down, your rate stays the same. Fixed rate mortgages provide certainty for a number of years which suits many people, and for this reason they are usually the most popular type of mortgage on the market.

Capped Rate

Capped rates are less common than they once were. A “ceiling” interest rate is set, and you will never pay more than this, although you could pay less if rates go down. Many capped rate mortgages also come with a “collar”; a lower interest rate limit beyond which your payments cannot fall.

Tracker Rate

A popular alternative to fixed rates, trackers will quite literally “track” the Bank of England (BoE) base interest rate, which is reviewed once a month. Trackers run at a fixed percentage above or below the BoE rate, and change in line with any monthly changes in that rate. So if, for example, you took out a tracker mortgage at 0.25% above the BoE rate, if the BoE rate were 5.75%, you would pay an interest rate of 6%. If the BoE rate is reduced the following month to 5.5%, your new mortgage payments would now run at 5.75%. Tracker rates suit people who have the financial “slack” to afford their mortgage payments if the BoE rate rises, but want to benefit if the BoE rate falls.

The current Bank of England Base Rate is published on the Bank of England Website (see icon in the right hand column).

Discount Rate

Discount rates work on a similar principle to Trackers, in that the rate you pay can go up and down and is linked to another interest rate, but with Discount rates your payments are linked to the lender’s SVR. Discount rates literally give the borrower a fixed discount off this SVR, but move in line with it. So, for example, if you take out a mortgage at a 1% discount and the lender's SVR is 7.5%, your mortgage payments run at 6.5%. If the lender raises their SVR to 7.75%, your new mortgage payments now run at 6.75%. Like tracker mortgages, discount rate mortgages suit people with financial “slack” better than people on a tight budget.

Offset Mortgage

Rather than being a separate type of mortgage, this is more a feature that a small group of mortgage products offer. The mortgage comes with a current (bank) account, usually with an associated chequebook and debit card. Any funds that the borrower keeps in this current account are “offset” against the mortgage, saving the borrower interest. So, for example, if a borrower takes out a £110,000 mortgage but has £10,000 in their mortgage current account, the lender charges them interest only on £100,000 of the loan. Therefore an offset mortgage can be viewed as a type of savings account, whereby the borrower “earns” interest by saving on his or her monthly mortgage payments.

How to choose?

Most mortgages, standard variable rate excepted, are treated as “special” rates, which the borrower and the lender agree will last for a set period, typically 2-5 years. After this time, the borrower’s mortgage will revert to the lender’s standard variable rate, unless the borrower chooses to remortgage, usually a good idea financially. Any “special” rate may attract a booking or arrangement fee to secure the rate for the borrower, as well as early repayment charges if the borrower pays off that mortgage within the initial set period (the aforementioned 2-5 years).

Click on the icon in the right hand column to access the FSA's guide to interest rate types.

It should be clear by now that as a mortgage borrower, you have a large variety of options when it comes to selecting the right deal for you. That is why it makes sense to seek our advice before making a final decision - after all that's what we're here for!