A mortgage is likely to be the financial product which has the biggest impact on your life and choosing which one is right for you will probably be your biggest ever money decision.

However, fear not as mortgages aren’t that complicated and two of the three types available probably won’t even be options for you so the decision is even simpler.

At its most basic, a mortgage is a loan used to buy property that lasts for between 5-35 years. The bank lends you the money to buy the house or flat then you repay that over a long period of time with interest and if you fail to pay up your house could be repossessed.

Most people will need a mortgage at some point in their lives as the average salary is around ten times the average house price making property ownership impractical for many without a mortgage.

There are three types of mortgage available: repayment, interest-only and offset.

Repayment Mortgages

Repayment mortgages are the simplest, most common types of mortgage.

The bank lends the money to purchase the house and every month for the mortgage term you repay some of the loan and the interest so that at the end you owe nothing.

Interest-Only Mortgage

Interest-only mortgages are less common now due to the increased risk they pose to banks but are still available to some.

With an interest-only mortgage, your monthly payment covers the interest charges and at the end you owe the money you borrowed to buy the house. This is often covered by an investment plan although in many cases people end up with a shortfall and cannot repay.

Offset Mortgages

Offset mortgages are similar to a repayment mortgage however they are linked to your bank account. This means that the money in your account can be used to reduce your mortgage payments and the interest.

These mortgages also offer the facility to borrow more.

---

In addition to the different types of mortgages there are also different types of mortgage interest rates: fixed, variable and tracker.

Fixed rates (as the name suggests) do not change over the mortgage term and are unaffected by market shifts meaning they can become more or less expensive than others available – such as those on a cheap fix now will be very happy!

Variable rates (also known as the SVR) are changeable depending on shifts in the Bank of England’s base rate and are often the most expensive and are what you would end up on when a fix ends.

Tracker rates follow the Bank of England’s base rate (plus an extra percentage) and could be a good idea depending on the market.

---

Do comment your thoughts below.