.A guide to the different types of mortgages

At face value mortgages seem straightforward - you borrow money to buy a house and then pay back the loan plus any interest.

But the more you look into mortgages the more you realise that it's not quite so simple after all.

The mortgage market is very competitive, building societies and banks are forever updating and extending the range of mortgages they offer, adding to the extensive list of products that are already available.

When deciding on what mortgage product best suits your needs the most important points to consider are how you will be paying back the capital you have borrowed and the interest that has been added to it.

Paying back the capital

The capital part of the mortgage can either be paid back a little bit each month over the term of the mortgage (repayment mortgage) or it can be repaid at the end of the mortgage term (Interest only or endowment mortgages).

Repayment mortgages - With a repayment mortgage each monthly payment pays off a little of the underlying debt and interest on the loan. At the end of the term the mortgage is guaranteed to be cleared.

This is generally considered to be the most easy to understand and least risky mortgage type.

Interest only mortgages - With an interest only mortgage you pay-off the interest on the loan but not the capital. At the end of the mortgage term you are expected to repay the total of the capital that was borrowed, how you do this is up to you.

With this type of mortgage care needs to be taken that adequate procision is made to have sufficient funds available to pay of the capital portion of the mortgage at the end of the mortgage term. This type of mortgage could therefore be considered to be riskier than a repayment mortgage.

Endowment Mortgages - With an endowment mortgage you use an endowment policy to provide life insurance and to save the funds to repay the capital portion of the loan at the end of the mortgage term.

However the inherent danger with this type of mortgage is that if the investment performs badly, you could face a shortfall on the capital portion of your mortgage at the end of the repayment period.

Paying the interest

There are a number of ways that the interest can be paid on a mortgage.

Variable rates - With a variable rate mortgage you pay the current going rate on your loan. The mortgage rate changes every time interest rates change or, as in many cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Whatever kind of mortgage you start with, it is likely to change to variable rates at some point.


Fixed rates - With a fixed rate mortgage the interest rate is fixed for an agreed period - often two to five years. The advantage of a fixed rate mortgage is that they help in budgeting and are attractive if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit.


Capped rates - These are similar to fixed rate deals but if rates fall you pay the lower rate. Once again this can be a good for budgeting.


Cash back deals - This is when lenders offer money back if you take out a particular product. However, you may find that there may be substantial penalty charges if you wanted to switch lender in the early years.


Discounted rates - With a discounted mortgage the borrower is offered a discount off the lender's variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term, usually two to five years as with fixed rate mortgages