Navigating the MORTGAGE Maze

In recent years competition among lenders has been fierce leading to wider choice and better value for prospective borrowers.

Mortgages have never been so complicated, many products incorporate extra flexibility allowing you to overpay and underpay if that is important to you.

With thousands of products to choose from just how do you choose which is right for you?

Before you rush in make sure you at least understand the basics.

What is a mortgage?

A mortgage is simply a loan that is secured upon a property. This means that if you fail to keep up your monthly payments, the lender can force the sale of your home to recover the money they are owed.

Lenders will typically allow you to borrow 3 to 4 times your income, or 2.5 to 3 times the joint income of you and your partner.

It is possible to borrow 100% of the property value, but most will limit you to 95%. When borrowing a high percentage, check if you will have to pay a Mortgage Indemnity Guarantee Premium.

Although you pay this it protects the lender (not you) in the event that you default on the mortgage and they lose money.

How do I repay the mortgage?

There are essentially two main methods:

• Interest-only:

  With this type of mortgage your monthly payments do not reduce the amount owed, instead you just pay the interest charged by the lender.

  Unless you then pay into a savings policy to ultimately repay the debt you will always owe the amount you borrowed. The hope is that the savings policy will grow into an amount large enough to repay the whole mortgage in one fell swoop at the end of the mortgage term.

  If the savings policy performs well it may be worth more than the mortgage at maturity and you are paid any surplus. If it under performs it will not repay the mortgage in full and any shortfall would have to be made up by you.

  In the past many borrowers used endowment policies to run alongside these mortgages, but falling investment returns in recent years has caused their popularity to plummet.

  Other savings policies include Isas and pension plans, but they do not include life cover so you will normally need to buy this separately.

• Repayment

  With a repayment mortgage, your monthly payments include both interest and capital. This means that as long as you keep up payments you are guaranteed to owe nothing at the end of the mortgage term, without reliance on savings returns meeting expectation.

  The repayment mortgage is the 'risk free' mortgage.

Types of Mortgage

So much for how you repay the mortgage, let's now turn to what types of mortgage products there are to choose from. Each of the types may or may not include various extra flexible features but broadly they can be summarised as follows:

• Variable rates/payments These are mortgages where your monthly payments will rise and fall in line with fluctuations in interest rates.

  Many lenders will give a discount from their standard variable rate (SVR) in order to attract you to them. In return for this they will normally require you to keep your mortgage with them for a number of years.

  Some lenders will link your rate to the Bank of England Base Rate instead of their SVR and these are known as trackers.

• Fixed rates/payments

  These are ideal for borrowers wanting to know exactly what their monthly payments will be. With a fixed rate your payments will stay the same for a defined length of time, irrespective of any variable interest rate fluctuations.

  A capped rate gives the advantage that your payments can never go above a predefined level, but unlike a fixed your rate can fall below this.

But which is right for me?

Capped rates are usually most expensive followed by fixed rates and then discounts. This means you are paying a premium for the extra benefit they offer.

Fixed and Capped rates are ideal for those wanting to know exactly what their mortgage payments will be. On the other hand if you are happy for your payments to fluctuate then the discount rates will usually be cheaper.

Always bear in mind that whilst payments might look affordable now a mortgage is a long term commitment so you must be sure that you can afford them in the future as well as today.

Helpful hints

Whatever you choose, make sure that you read the small print. Avoid products that tie you to the lender for longer than the incentive period as these will generally offer poor overall value.

If in doubt ask the adviser to explain things again and again until you are completely comfortable. A mortgage is the largest financial commitment you are likely to make so don't be embarrassed, getting it right first time is vital for your future financial well being.

Where to get advice?

You might seek advice from your Bank or Building Society, but with over 4,000 mortgage products in the UK it is pot luck as to whether or not they will have the market leading product.

An independent broker should scour the market for you, but make sure you ask if they will charge a fee for their advice, it could typically be as much as 1.25% of the loan. Some make no charge at all.

This guide was written by Patrick Bunton, Head of Operations and Compliance at London & Country Mortgages Ltd.