A mortgage is a special type of loan that allows a first time buyer to borrow a seemly ridiculous amount of money towards the purchase of a house. However, mortgages make home ownership possible for the masses. As a first time buyer, I know that mortgages can be extremely confusing. Firstly, there are fixed, variable and interest only mortgages. Then there are so many options from so many lenders. Let us start by explaining the three different types of mortgage.
The first two types of mortgage are repayment mortgages. They are called repayment mortgages because you repay both the interest and the amount you borrow. Repayment mortgages are the most common choice amongst first time buyers.
A fixed rate mortgage has an interest rate that stays the same for the length of the arrangement. This option is for the risk averse. Getting a fixed rate mortgage allows you to plan your finances for the length of the arrangement because you will know your exact repayment each month.
The downside to fixed rate mortgages is that 1) they are only fixed for a period of time and 2) they generally have a higher rate of interest than a variable rate mortgage.
A variable rate mortgage has an interest rate that varies for the length of the loan. Interest rates can go up as well as down and they are generally dictated by the Bank of England base rate. If you are economics expert and you feel that interest rates will go down, you may decide that this is the best option. If you are not an economics expert, we think it's best to seek independent advice.
Due to the added risk of a variable rate mortgage, the interest rate is generally lower than that of the equivalent fixed rate deal.
Interest Only Mortgages
An interest only mortgage is where you only pay the interest on the amount that you owe to the lender. Under this arrangement, you are not actually paying back the money that you have borrowed (only the interest) but there are special cases when you might want this kind of mortgage.
If you can invest your spare money in something that grows in value, you should be able to pay-off the mortgage when needed.
Other Types of Mortgages
You may come across mortgages that combine some form of investment with one of the above mortgage types - such an investment may be an endowment or an ISA. It is best to check the terms and conditions of a mortgage, whether it is unique to a lender or otherwise.
If you are still in doubt about mortgages, we recommend that you seek help from an independent financial advisor.