3 - Understanding your mortgage

There are lots of different mortgages on offer - and plenty of information and guidance to help you choose the one that suits you best. We've explained the basics to get you started.

Learning the language - mortgages

A mortgage uses your property as security for a loan. This is why a mortgage is cheaper than other types of loan. However if you don't keep up repayments on the mortgage, the lender can go to court for a possession order to repossess your home.

How does a mortgage work?

A mortgage has two parts:

Capital - the money that is borrowed
Interest - the charge made by the lender until the loan is paid back.

How do I choose the right mortgage?

There are two initial decisions to make when you choose a mortgage � how you want to repay the loan and what type of mortgage suits you best.

How do you want to repay the loan?

There are two main ways to borrow money for a home - an 'interest-only' mortgage or a 'repayment' mortgage.

With an interest only mortgage, you only pay the interest on the amount you borrowed each month. This means that at the end of the mortgage term you will still owe the same amount you borrowed, so you�ll need to plan how to pay this off. In recent years a lot of First Time Buyers have taken their mortgage interest only for the first 1 to 3 years to keep their repayments down at the start.

With a repayment mortgage, you pay off part of the capital each month, as well as the interest. This guarantees that your mortgage will be repaid in full at the end of the term, as long as you keep up the repayments. This is the most common choice for borrowers purchasing their family home.

What type of mortgage suits you best?

Every lender has a different range of mortgages. These are the most common options:

Standard variable - Most lenders offer a standard variable mortgage rate, which can move up or down at their discretion, but normally only when the European Central Bank Rate changes.

Fixed - A fixed rate can help you budget, because the interest rate you pay - and your monthly payment - will be fixed until a set date. This means you will know exactly how much you will need to pay each month.

Capped - These mortgages guarantee that your interest rate - and your monthly payment - will never go above a set figure within the capped-rate period. Below that set figure, the rate will move up and down in line with the lender�s standard variable or tracker rate.

Discount - This type of mortgage gives you a discount off a Variable or Tracker rate for a specified period, normally 1 to 2 years. Your rate will move up and down to correspond with changes in the ECB rate. Discounted rates can help to keep your payments down at the start.

Tracker - this interest rate tracks the European Central Bank rate by a set percentage. Every time the ECB rate changes, so will the payments on your mortgage. It is slightly different to a standard variable rate, where the lender has the flexibility to choose when the rate goes up or down. Tracker rates generally offer better value than variable rates and thus have become the most popular choice for First Time Buyers.

Current Account - These mortgages give you the chance to offset your savings or current account balance against the mortgage balance. You don't receive any interest on your savings, but also do not pay interest on the equivalent amount of your mortgage. The bigger the balance in your savings / current account the more you save on interest.

Speak to your own dedicated MortgageLine advisor to discuss your options.

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