There are many different mortgage products available and the choice can be confusing. The following are some notes to help you decide which type of mortgage and which product is most suitable for you.

Also known as the Capital and Interest mortgage. This involves the borrowing of a sum of money over a chosen term, often 25 years. The borrower makes a monthly payment to the lender consisting of interest charged and a capital repayment. The outstanding debt gradually reduces which reduces the interest and increases the capital portion of the monthly payment. During the early years of a 25 year mortgage, therefore, the monthly payment consists mainly of interest and during the latter years mainly capital.

Advantages: This is the only method which guarantees that, by the end of the mortgage term,
the mortgage will have been repaid. The borrower can see the mortgage debt reducing each
year. A larger deposit is available for next time buyers as the debt reduces.

Disadvantages: If you move house there is a temptation to take out another mortgage over
25 years to reduce the monthly payment.

The borrower agrees at the outset with the lender that only mortgage interest will be paid each month and that the total capital borrowed will be repaid at the end of the term as a lump sum. You will, therefore, need a separate savings vehicle to run alongside the mortgage so that the mortgage can be repaid at the end of term. This is usually in the form of an endowment, ISA or pension.

Advantages: A choice of a range of investments plans can be used some of which have
tax advantages.

Disadvantages: There is no guarantee that your chosen investment will realise enough to
repay the mortgage.
 

An endowment is essentially a savings plan taken out with a life assurance company which includes sufficient life cover to repay the mortgage on death. It is designed to provide a lump sum at the end of the term to repay the mortgage. The lump sum, however is not guaranteed to be sufficient to repay the mortgage, it may be more but could be less depending on the investment performance of the provider. There are "with profits" endowments and unit-linked endowments.

Advantages: You can maintain your policy if you move house or change lender.

Disadvantages: If an endowment is cashed in before running the full term you will certainly lose money.
 

Monthly interest is paid to the lender and in addition monthly contributions are made to a personal pension plan. Arrangements for life cover will need to be made. The tax free lump sum is used to repay the mortgage.

Advantages: Tax efficient (especially for higher rate tax payers). Pension contributions qualify
for tax relief at up to 40%. A pension fund is built up.

Disadvantages: By using the lump sum to repay your mortgage you may have insufficient
income in retirement. Poor investment performance could result in the tax free lump sum
payable on retirement being insufficient to repay the mortgage debt. Your mortgage may
be longer than 25 years dependant on your age when mortgage commences. You may
change employments and become ineligible to contribute to personal pension. Usually the
most expensive method.
 

Again, monthly interest is paid to the lender and in addition you make contributions to an ISA. ISA's use the stock market for investment. Life cover provisions will need to be made.

Advantages: Tax free growth of fund. Possibility of paying off mortgage early if
investments perform well.

Disadvantage: Investment in an ISA is limited to £7000 per annum so probably not suitable for
a large mortgage. An untimely dip in the stock market could result in there being insufficient
funds to repay the mortgage at the end of a term. As there is instant access to the funds built
up there could be a temptation to withdraw capital for other purposes.
 

Based on the standard rate of interest set by the lender. The monthly payment goes up and down, normally in line with Bank of England base rate.
 

The rate of interest charged is the variable rate lens an agreed discount for a period of years. The rate charged will still vary but will be below the standard variable rate by the agreed discount. Sometimes penalties are imposed if the mortgage is redeemed within the discount period.
 

The rate of interest charged is fixed for a given period of time as agreed with the lender usually between 1 and 5 years but can be for the term of the mortgage. Your monthly payments will not change during this period. At the end of the fixed rate period your mortgage will revert to the variable rate. During the fixed rate period penalties are normally imposed if you redeem all or part of the mortgage early.
 

A capped rate mortgage is a variable rate mortgage which has a fixed upper rate limit to which it cannot go above. It can, however, go down if the variable rate falls below the capped rate. The capped period is normally between 1 and 5 years but can be longer. Penalties may be payable if the mortgage is repaid during this period.
 

Interest is calculated daily or sometimes monthly, unlike the traditional mortgage where interest is usually calculated annually. The interest charged is generally variable. Overpayments are allowed and payment holidays are allowed. By making overpayments, if you have a repayment mortgage, it is possible to reduce the term of the mortgage considerably. Most lenders normally offer, within the package, a reserve fund can drawn upon for any purpose. Flexible mortgages are normally penalty free.
 

Similar to flexible mortgages but with the addition of current account and savings account. The average balance on a current or savings account are deducted from the mortgage balance and interest is charged on the net amount. For those with substantial deposit accounts receiving a low rate of interest, this type of mortgage is ideal, especially for higher rate tax payers.
 

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