This is by no means a comprehensive guide to mortgages. We have selected the most common methods and given a brief, and what we hope to be, simple explanation of how they work.

What is the best mortgage available?
The best mortgage is NO mortgage!! Failing that, the best mortgage is the one that suits your individual circumstances.

The Different Types of Mortgage
There are two basic types of mortgage:

+ Capital repayment
+ Interest Only

Capital repayment loans require payments to the lender, which consist of a combination of Interest and capital repayment. In the early years the interest element forms the major component of the payments and as a result the borrowing will reduce very slowly during the first third of the mortgage term. The repayment of the amount borrowed then accelerates and the amount outstanding falls rapidly during the last third of the term of the loan. Providing that payments have been amended in line with the interest rate being charged, the loan should be repaid by its expiry date.

Advantages of a capital repayment mortgage
+ Guaranteed mortgage repayment (provided full payments are made throughout the term.)
+ Can extend term of mortgage to reduce payments.
+ Part of the mortgage is repaid with every instalment made.
+ You may be able to repay your mortgage early by paying additional amounts.

Disadvantages of a capital repayment mortgage
- Life cover is not provided.
- Little capital repaid in early years of loan.
- No potential for cash surplus at end of mortgage.
- Critical illness cover could be more expensive on a stand-alone basis, compared to when say added to an endowment policy.

Interest only loans require payments, which cover the interest but make no reduction to the amount borrowed. The lender will require the borrowing to be repaid in a lump sum at the expiry date of the loan. It is usual for an investment plan to be put in place to provide for the repayment of the loan on the due date. Capital repayment is usually enabled by regular investment over the required number of years into one or more of the following plans: Individual Savings Account, Unit Trusts, Investment Trusts, Endowment Policies and the Tax Free cash from personal pension plans.

Advantages of an Interest Only mortgage
+ Endowments, ISAs, and pensions are portable which means you could keep your existing policy if you move home and switch it to your new mortgage.
+ Critical illness cover can be built in to some policies that can be more cost effective than stand-alone policies.
+ Could make increased payments to the lender in order to reduce the loan.
+ Life cover for the full amount of the loan will be included within the endowment premium.

Disadvantages of an Interest Only mortgage
- There is no guarantee the maturity proceeds of the repayment vehicle will provide enough capital to repay the loan.
- An endowment, ISA and pension policy is a long-term commitment and should be held for the full term of the mortgage. Some policies can provide a poor return if cashed in early, which may be less than the amount paid in.
- Whether an endowment, ISA or pension suits you depends upon your attitude to investment risk - how well you think investments will grow and the cost of the loan. If you are not comfortable with taking an investment risk a repayment option is likely to be a better choice.

Note: It is your responsibility to ensure that you have sufficient funds to repay the mortgage at the end of the term otherwise you could lose your home.

Mortgage Deals Explained

Variable Rate
Your monthly payments to the lender are variable, and depend on the interest rate at the time. Therefore, as interest rates change, so do your payments.

Discounted Rate
This is a variable rate, with a discount applied for a period of time, for example, a 1% discount off the standard variable rate for two years.

Cash back
This is a variable rate, but when the money is lent to you, the lender will also pay you a cash bonus, for example, 3% to 5% of the amount borrowed.

Fixed Rate
The lender will fix the interest rate for a set period of time - usually between one and five years. After the fixed period ends, your payments will revert to whatever the variable rate is at the time.

Capped Rate
This is a variable rate with a specified maximum interest rate that your payments cannot exceed, for a set period of time usually one to five years. You know at the outset what your maximum monthly payments will be (the capped rate). However, if the variable interest rate falls below the capped rate, your mortgage payments will go down. At the end of the capped rate period, your payments will revert to whatever the variable rate is at the time