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There are a vast number of mortgages available from various lenders and it is often hard to differentiate between them. However the most important considerations are how you pay back the capital you borrow and how you pay the interest on it:

PAYING BACK THE CAPITAL

you can either pay back the capital as you go along (repayment mortgage) or pay it all off at the end of the mortgage term (interest only).

Repayment mortgage

Each monthly payment pays off a little of the underlying debt, as well as interest on the loan. If you keep up the repayments, at the end of the mortgage term the mortgage is cleared.

Interest-only mortgage

With an interest-only mortgage your monthly payments only cover the interest on the loan - they do not pay off the loan itself. You will therefore have to make separate arrangements to pay off the loan when the mortgage ends.

For example:

Option 1 - save regularly
You make payments into a savings or investment scheme each month to build up a lump sum to pay off the mortgage when the time comes. However, there is no guarantee that your money will grow enough to pay off the mortgage in full by the end of the mortgage term.

Option 2 - change to a repayment mortgage later
This might be a suitable option if your earnings are low now but are expected to be much higher in future. Using an interest - only mortgage keeps your monthly payments down until you can afford the higher monthly payments of a repayment mortgage. However, because you’re not paying anything off the amount you owe, you will probably end up paying more interest in the long run.

PAYING THE INTEREST

Different mortgages offer different interest rates and terms:

1. Variable rate - a variable rate mortgage is where the interest rate is not fixed and generally follows the direction of the Bank of England’s monthly base rate. The rate can be moved up or down without prior notice.
2. Fixed rate - A fixed rate mortgage is where interest repayments to the lender are fixed for a specified term, and are not altered by the base rate. these are ideal for budgeting or if you think rates might increase, however you do not benefit if rates fall, and will face penalties if you try and exit before the term ends.
3. Capped rate- A capped rate mortgage guarantees the interest rate charged will not rise above a certain level, however if the lenders rate falls below the level of your ‘cap’, your rate will fall. The rate of interest on capped rates tends to be higher than for fixed rate mortgages and fewer lenders offer them, restricting choice.
4. Discounted rate - A discounted rate mortgage guarantees the interest rate charged will remain a set number of percentage points below the lender’s standard variable rate over a set term. the rate changes as base rate moves up and down, but the relationship between base rate and the rate you pay remains constant.
5. Base rate trackers - a base rate tracker mortgage follows movements in the base rate and tracks the rate at a set margin; either a fixed amount above or below. as with the variable rate mortgage, the rate can be moved up or down without prior notice.
6. Flexible mortgage - a flexible mortgage is designed to give you more control over your finances with varying degrees of flexibility; you are able to overpay, borrow back overpayments, underpay and take payment holidays. there are no tie-ins with flexible mortgages, enabling you to redeem the mortgage at any time without incurring a penalty. however you do pay for the flexibility. fully flexible mortgages usually have higher rates of interest than standard deals and are only worthwhile if you take advantage of all the flexible features.
7. Current account mortgage - A current account mortgage combines all your finances into one single account - your mortgage, current bank account, savings and personal loans. Any unspent income you have in your account at the end of the month is automatically used to reduce the outstanding balance on your mortgage. rather than have a separate savings account, any surplus that you would normally save into a separate account in effect goes directly to reducing the total mortgage debt and immediately reduces the amount of interest charged at the end of the month. These accounts typically allow you to overpay or underpay each month, so you have full control over your spending.
8. Offset mortgage- An offset mortgage is similar to a current account mortgage, however your savings and mortgage are kept in separate ‘pots’.
9. Cash-back- Cash-back mortgages are often aimed at first time buyers. The mortgage lender will offer a lump sum of cash at the start or at an agreed point during the term of your mortgage. Usually the cash-back is offered as a package of benefits (e.g. linked with a discount) but pure cash-back mortgages are not uncommon. mortgage lenders may offer a sum of money towards the cost of legal fees or survey charges. However with a cash-back mortgage, rates of interest tend to be higher.

There are other factors that need to be considered when choosing a mortgage:

Higher lending charge

The higher lending charge, formerly known as a mortgage indemnity guarantee (mig), is a fee charged by a mortgage lender where the amount borrowed exceeds a given percentage of the value of the property. this fee may be used by the lender to purchase an insurance policy designed to protect it (the mortgagee) against loss in the event of you defaulting and ceasing to repay your mortgage. the fee may be insisted on by the lender at the start of the loan and usually costs a few thousand pounds.

Mortgage guarantor

if your income is too low for a mortgage you can use a mortgage guarantor. this is a person who will guarantee that the mortgage repayments are made in the event of default by the borrower. Usually this will be a parent or relative of a borrower. it should be remembered that a guarantor would be fully liable for repayment of the mortgage amount if a borrower defaults. the guarantor should therefore be confident that the borrower will meet all the necessary monthly payments. Costs When choosing a mortgage, you should consider more than the rate of interest. other fees such as the lenders arrangement fee and a mortgage valuation charge should be taken into account.

Working out how much you can borrow

When you take out a mortgage, lenders look at a number of things to work out how much you can borrow. These include your earnings and outgoings, the property value and your credit history. Most lenders use a standard income multiple when basing the mortgage on your earnings. This varies between lenders but tends to be anything between three to four times your income. It is important that you have saved up beforehand to cover your costs. You will need to pay a deposit for the house, legal fees, stamp duty, survey fees, removal costs, plus the purchase of any furnishings you may need for your new home.