The concept behind a mortgage is relatively straightforward, you borrow money in order to buy a house and then pay interest on the loan over a prolonged period until you have paid firstly all the interest, and then the loan itself and ultimately end up in ownership of the house. Unfortunately, things aren't always that simple, the market is convoluted and complex and there are many different variables, factors, and options involved. The most important thing is how you pay back the capital that you have borrowed, and how (and how much) you pay the interest on the capital.



Paying Back the Interest

As with any other form of loan you have to pay interest on the debt involved in taking out a mortgage. Unlike many forms of loans there are a number of different options involved in paying back the interest on a mortgage, and sometimes mortgages change between different methods.

Variable Rates

This means that you pay the going rate on your loan. The mortgage rate changes every time interest rates change or, more commonly, the overall effect of any interest rate changes are calculated once a year and payments are altered accordingly. Variable rates are the most common types of mortgage as they carry the least risk for the lender, though perhaps not the best value. Therefore, whilst a mortgage may start with a different interest model, it will probably change to variable rates.

Fixed Rates

The opposite of variable rates in a fixed rate mortgage the interest rate is fixed for a certain agreed period. This is ideal for budgeting or if it seems that rates might increase. You do not benefit if rates fall, and will face penalties for trying to quit. Often mortgage companies offer very low introductory rates for the first few years that may appear tempting, but keep an eye out for more expensive rates towards the end of the term.

Capped Rates

These are fixed, but if rates fall you pay the lower rate.

Cash Back Deals

A cash back deal is when a lender offers money back if you take out a particular product with them. However, these are rarely a great idea as nothing is free and therefore the cash back deal may be weighed down with hefty penalties if you later try and change lender, or with more expensive rates towards the end of the term.

Discounted Rates

Under this type of mortgage the borrower is offered a discount off the lender's variable rate. The rate that you have to pay fluctuates in line with changes in the variable rate and the discount applies to a set term, after which the rate may be higher than the variable rate, or you may have difficulty changing lender.