Which mortgage is best for me?

ROUGHLY the way you repay mortgages fall into two categories - repayment and interest only.

With a repayment mortgage you make part interest and part capital repayments to the lender each month and in this way the capital debt outstanding is reduced until the loan is repaid.

With an interest only mortgage it is usual to use what is known as an investment vehicle to repay the loan at the end of the mortgage term and in the meantime interest is paid to the lender on the outstanding balance. The debt remains the same while the value of the investment should increase, usually over a specified term, when the value should equal or exceed the original debt. The most common forms of investment vehicle used are endowments or personal pensions.

BUY TO LET
A mortgage intended for people who buy a property with the intention of letting it out. Largely similar to other mortgages, but the maximum loan-to-value (LTV) is usually lower. Other restrictions may also apply, such as minimum letting terms and rental income.

CAPPED MORTGAGES
Normally agreed for a fixed period of time, many lenders provide mortgages with an upper limit on the interest rate. Thus if the standard interest rate is lower than the upper limit you will be charged the lower rate, but if the standard variable rate is higher you will be charged at the agreed rate.

CASHBACK MORTGAGES
This is normally a variable base rate mortgage but one where the lender offers an incentive to the borrower by giving them a lump sum of money. This lump sum is normally a percentage of the amount borrowed and is normally paid at the start of the mortgage term.

CURRENT ACCOUNT MORTGAGES
These merge your bank account and mortgage into one. You get the usual chequebook and plastic cards. This saves money, too, because you make a massive overpayment into your mortgage each month by means of your salary cheque, and daily calculation of interest cuts your debt. They are most suited to the financially disciplined.

DISCOUNT RATE MORTGAGES
Discount rates are made available by lenders discounting the interest from their Standard Variable Rate for a given period of time (for example from 2 to 5 years). At the end of this period the mortgage reverts to the then prevailing Standard Variable Rate.

ENDOWMENT MORTGAGES
An endowment mortgage combines an interest-only mortgage with an endowment policy which includes life insurance cover. The endowment policy itself is not a mortgage - it is a long term investment. As well as paying interest on the mortgage/loan, you make regular payments to the endowment policy. The aim is to build up a fund by the end of the mortgage term that matches the loan you must then pay off. The amount you save each month is set at a level which is intended to make this goal possible, provided your investment grows at an assumed rate. These types of mortgage are currently out of favour.

FIXED RATE MORTGAGES
With fixed rate mortgages the monthly payments are fixed for a given period of time and cannot be altered by interest rates fluctuating. Fixed rate periods are usually from 1 to 5 years. At the end of the fixed rate period the rate reverts to the then prevailing Standard Variable Rate. A minus point is that a fixed rate loan commits you as well as your lender. If interest rates fall, your mortgage payments will remain the same, so you should think carefully about how long you want to be locked into the fixed rate.

FLEXIBLE MORTGAGES
These mortgages provide more options than a traditional loan. Different lenders offer different features, but a flexible mortgage provides daily or monthly recalculation of your mortgage debt plus the opportunity to make non-penalty overpayments at any time thus making it easier to repay the mortgage early. Flexible mortgages may also offer banking facilities as well as the ability to draw on overpayments if you need to. A tax effective option some borrowers choose is to pay their deposit savings off the mortgage, effectively earning a net rate of return equivalent to the mortgage on these investments. The minus point is that the interest rate is usually higher, so to get the full benefit you need to be able to make overpayments.

ISA, PEP, PENSION MORTGAGES
These are like endowment mortgages, except that instead of combining a mortgage with an endowment policy, you choose a different type of investment to pay off the mortgage loan at the end of the term. Currently, you save through either an ISA (individual savings account) or a personal pension. There are different types of ISA. For mortgage purposes, you are most likely to use a stocks and shares ISA investing in, for example, unit trusts. In the past, you may have saved through PEPs (personal equity plans). From 6 April 1999, you have not been able to pay any new money into PEPs but you can keep going any PEPs you had already started before that date. From 6 April 1999, you should have switched your new savings to ISAs instead. If you choose an ISA or a personal pension to pay off a mortgage loan, you may need to take out separate life insurance cover if you have dependants.

TRACKER MORTGAGES
A tracker mortgage allows your monthly payments to be decided by the Bank of England's current base rate. You will therefore benefit from interest rate drops that occur. However, on occasion the Bank of England will announce a drop in interest rates but lenders will not.

VARIABLE RATE MORTGAGES (also known as Standard Variable Rates)
Your monthly payments are determined by the prevailing market interest rates being charged. The interest rate is variable and will fluctuate in line with current trends and interest rates generally.

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