Motgage maze
Discount mortgages; offer a certain percentage off the lender's standard variable rate (SVR) for a set period, usually between 1 and 5 years. As the SVR moves, so does the pay rate on a discount mortgage, so you need to be able to cope if your monthly repayments increase.
Tracker mortgages; have a variable rate linked to the Bank of England’s base rate. This could last for the length of the mortgage or only for a short period at the beginning of the loan. Some lenders offer discounted trackers, which have a rate that is a set percentage below the base rate, while others add a percentage to the base rate. Both deals move up and down in line with any changes announced by the Bank of England. This is beneficial when rates are going down, but when rates are rising so will the mortgage repayments.
Fixed-rate mortgages; allow you to fix the rate of interest you pay on your loan for a set period of time, usually between 1 and 5 years, although longer term fixes are available. This is useful if you are stretching yourself to afford a property, as your repayments cannot increase during the fixed-rate period. Fixed-rate mortgages can save you money if interest rates are rising, but if the base rate falls you could end up paying more than borrowers on variable rate deals.
A small handful of mortgages will track a different index to the base rate, often the LIBOR (London Inter Bank Offered Rate), however these tend to be less popular with borrowers.
Most lenders apply early redemption charges during a fixed or discount period. This can make it expensive to move your mortgage during that time.
Many short-term mortgage deals revert to the SVR after the initial offer period, which usually means increased repayments.
Interest-only or repayment
Once you've decided on the type of loan, your main decision will be whether to choose an interest-only or repayment mortgage. With an interest-only mortgage each month you repay just the interest incurred on your borrowing. The capital is only repaid the day the mortgage ends, and can be paid off using whatever money you choose. This could be cash from an inheritance or money built up in a separate investment vehicle.
With a repayment mortgage, both the interest and capital is repaid to the lender each month. This way you are guaranteed to have paid off the debt at the end of the mortgage term and you will own the property outright.
You can also have a mortgage split into part interest-only and part repayment, for example, if you have taken a top-up loan or want to keep the monthly repayments down on part of the debt.
Flexible mortgages
Although there is no set definition for the term, a flexible mortgage will typically enable you to overpay by any amount without penalty, including redeeming the loan; allow you to take payment holidays or underpay providing you have overpaid enough in advance and borrow back on the mortgage (or drawdown) without charging.
Not all flexible mortgages offer all of these features, and some are available on "regular" mortgages.
Offset mortgages
Offset mortgages allow you to combine your borrowing with your savings. This is a kind of flexible mortgage with an extra feature: you combine your borrowing with your savings to reduce the amount of interest you pay over the mortgage term. So, for example, if you have £10,000 in savings and a mortgage debt of £240,000, you will only pay interest on the remaining debt of £230,000.
You have to move your savings to your mortgage provider, and will miss out on earning interest on your money, but offsetting could make a sizable difference to the total cost of your loan. Your own money is kept separately and you can gain access to it when you require.
Current account mortgages are a similar proposition, although they combine your day-to-day banking with your borrowing.
Offset and current account mortgages often have higher interest rates than other loans, and you need to make sure you have enough savings to make the deal worthwhile.
