Mortgage loans

There are two main types of UK mortgage loan available, repayment mortgages and interest only mortgages. It is probably the largest financial committment you will ever make and so it makes sense to understand all the terminology and get acquainted with the mortgages available.

Repayment mortgage

The Repayment Mortgage is the most common mortgage. This type of mortgage loan involves paying back both the actual cost of the capital expense (ie home) and the interest together in regular monthly installments. At the end, everything will be paid off. NOTE: Flexible mortgage - A flexible mortgage is similar to a flexible loan, in that it allows you the ability to fall short on some payments and not get penalised. Equally, you may pay more on other occasions.

Interest only mortgage

This works on a different principle. Basically, you pay off just the interest every month, leaving the actual capital expense unpaid. The remainder of the loan (the capital part) is paid back using one of the following options of placing extra funds in long term investments:

• Endowment- Extra payments to an insurance company - Into a savings plan. There are usually extra bonuses either every year or at the end of the mortgage loan plan.
• Pension- Extra payments go to a personal pension fund. This gives you a tax free (possible to get up to 40% tax relief) amount of money at the end of the term to pay off the capital expense. Beware though that due to being a pension fund, the term may go beyond the typical 25 years of a normal mortgage loan.
• ISA- Extra payments to an ISA, and because an ISA uses the stock market, this allows your payments to grow if the ISA is successful.

Interest rates on mortgages

Having selected the type of mortgage you are after, there are then the options on types of interest rates for that mortgage loan:

• Fixed-rate mortgage - This mortgage has fixed rate interest payments for an initial period, however, after this it usually goes back to the loan provider's variable rate.
• Variable rate mortgage - This type of home mortgage loan fluctuates according to the UK lender's current interest rates. This can be useful, but equally risky as your payments will change from month to month.
• Discount rate mortgage - Sometimes banks can offer you a cut interest rate deal for the frst year or so, and then the interest rates will go up to normal levels. This can be especially useful for first time buyers, allowing the money saved to be invested in other essentials.
• Base rate tracker mortgage - This type of mortgage loan uses a 3rd party interest rate instead of the loan provider.