SO, WHAT EXACTLY IS A MORTGAGE?
A mortgage is simply a loan secured on a property and/or land. It's usually a relatively large loan and is usually taken over a long period of time.
There are two options open to you:
Repayment Mortgage - (or 'capital and interest mortgage') works in a very similar way to a normal bank or building society loan (say, for a car) in that you borrow a sum of money (capital) and you repay it plus interest over a certain term; it's just a larger amount over a longer term. If all the payments are met, the mortgage is guaranteed to be repaid by the end of the term.
Interest Only Mortgage - exactly as it sounds; you just pay interest but none of the amount (capital) you actually borrowed. The capital is repaid under the conditions of whatever the particular mortgage lender considers to be a 'credible plan', for example with regular ISA savings made over the term of the mortgage. You should be aware that many lenders do not offer interest only mortgages any more.
Don't forget that, in both cases, the lender has security over the property.
HOW MUCH DEPOSIT DO I NEED?
Many lenders will consider a deposit as low as 5% but as a general rule, the higher the loan to value (LTV*), the higher the interest you pay. In order to keep your mortgage payments as low as possible we recommend aiming to secure as high a deposit as you can.
*LTV – amount you are borrowing compared to the purchase price or property value (whichever is lower).
HOW WILL MY INTEREST RATE BE SET?
You will have a choice of the way in which interest rates are set by lenders:
Fixed Rate - the rate is fixed for a determined period. So, for example, if your payment is fixed at 3% for five years, your interest rate and, therefore, your payment will not change during that time.
Tracker Rate - will normally track (follow), but be higher than, the Bank of England Base Rate. For example, you may be offered the Base Rate plus 3% for two years. This means that, during those two years, if the Base Rate increases, the rate applied to your mortgage will increase too. If the base rate falls, your rate will do likewise.
Discounted Rate - this is a discount on the lender's standard variable rate. You may be offered, for example, standard variable rate minus 2% for three years. If the lender's standard variable rate changes during that time, so will your interest rate and payment.
Standard Variable Rate - Each lender has a standard variable rate (SVR) which generally follows (but is higher than) the Bank of England Base Rate. It’s usually the rate to which your mortgage will revert when the introductory fixed/tracker/discounted rate ends. SVRs can vary a lot between lenders.