Picking a mortgage can prove quite daunting, so many of us turn to advisors to help select an appropriate loan. There are lots of different types of mortgage and product features that you'll come across, so let us try to help you get your head around some of the basics.
Paying back the loan
Some of the terminology you'll come across when shopping around for a mortgage relates to how the loan is paid back to the provider:
A repayment mortgage does what it says on the tin - every month you pay back some of the loan (both the capital and interest applied) to the lender, reducing your debt and at the end of term the mortgage is cleared.
A mortgage described as "interest only" sees you pay back the interest on the loan during the loan term, but not the capital. At the end of the loan term, you are required to repay the capital, so you'll need a plan for how you intend to raise this money.
Popular in the 1980s, endowment mortgages were interest-only loans that were sold with investment products alongside that were intended to repay the capital at the end of the term. Due to the performance of investments being unpredictable, this type of mortgage is now quite rare.
Adding the interest
There are also a host of terms that are related to interest and how it's applied to a mortgage:
Simply put, this means that the interest rate on the loan can change. Your lender will set a rate and the circumstances under which they may need to change it (such as when the Bank of England alters the base interest rate). Interest will be calculated at the rate most recently applied to your loan.
These mortgages have a set interest rate, usually for a limited period. At the end of this period, the loan will most likely revert to a variable rate. This kind of mortgage usually ties you in for a minimum term.
A capped rate mortgage has a variable interest rate, but with an upper limit applied to the rate, above which your interest payments can't rise.
This is another variable rate product but with a discount applied to the lender's standard rate. The discount may only apply for a limited period.
With this type of mortgage, the interest rate tracks a rate that is outside the control of the lender, such as the Bank of England base rate. Every time that rate goes up or down, so does the interest rate on your mortgage.
Other mortgage features
As well as all of the above, you may also come across phrases that describe certain other features of the mortgage:
If you take out an offset mortgage, the loan balance you are charged interest on will be reduced by the value of savings you hold with the mortgage lender. For example, if your mortgage was for £400,000 and you had £50,000 saved with the same institution, you'd be charged interest on £350,000.
These mortgages offer a cash lump sum paid after successfully taking out a mortgage.
As the name suggests, a flexible mortgage gives some leeway in certain areas. These may include under- or over-payments, payment holidays or an option to borrow back money already repaid on the mortgage.
Buy-to-let mortgages are tailored for people or businesses buying property as an investment. Eligibility criteria and loan terms may be different to a standard mortgage.
First-time buyer mortgages
All mortgages are available to people looking to buy their first home, but some lenders create mortgages with specific features for the first-time buyer mortgage market.
You'll more than likely see these terms used in combination with each other. You may even discover some terms we've not included here as providers are coming up with new features and names for things all the time. But hopefully these will help you understand some of the basic features of mortgages and help you assess the products you come across when looking for a new home loan.
Remember that whatever type of mortgage you take out, your home could be at risk if you don't keep up repayments on a mortgage or other loan secured against it.