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Mortgages explained

This best mortgage guide outlines the different types of mortgage, ways to repay your mortgage, as well as mortgage features and fees.

A mortgage is probably your most expensive monthly bill. Here's how they work:

Types of mortgage deal

There are a number of different mortgage types. Mortgage interest rates tend to move up and down with interest rates in general.

You can protect yourself against these changes and take advantage of great rates for new customers. Here are the main types of deal:

Fixed-rate – Your interest rate is fixed for a certain period (two to five years, usually). After that, you go back on to the lender's standard variable rate.
Discounted – You get a reduction off the standard rate for a set time – 2% off for two years, say. Rates can still go up and down.
Capped – A cross between the two. The interest rate can go up and down. However, there's a 'cap' – a maximum interest rate you can be charged.
Tracker – The rate is linked to the Bank of England Base Rate and automatically goes up and own with it.
Cashback – The lender pays you a proportion of the loan when it goes through – 5% of the purchase price, say. (So you'd get a cheque for £5,000 on a £100,000 mortgage).

These mortgages may have early repayment charges – fees that you have to pay if you switch to a different mortgage within a set period.

Choose a way to repay

There are two ways to repay a mortgage:

Repayment – You pay back some of the mortgage each month. At the end of the term, you owe nothing.
Interest-only – You pay only interest each month – so your repayments are lower. At the end of the term, you still owe the full amount. You should use the savings each month to invest in something (an ISA, say) to repay the loan at the end.

Special mortgage features

There are a couple of other types of mortgages

Offset mortgages – If you have a mortgage of £100,000 and £20,000 in a savings account, the lender will 'offset' the two amounts. You'll earn no interest on the savings – but you won't pay any interest on £20,000 of what you owe. As mortgage rate are higher than savings rates, you end up better off.
Flexible mortgages – You can vary your payments to suit you. You pay more when you can afford it and less in other months – or even take payment holidays.

Learn about fees

It's tempting to just concentrate on the interest rate. But fees are important. Here are the main ones:

Fee	What is it?	How to deal with it
High-lending charge	A fee to borrow more than 75% to 90% of the property value.	Not all lenders charge this– and the cut off varies by lender. Take account of it when comparing mortgages.
Arrangement fees	An up-front fee.	Mortgages either have these or they don't. Take it into account when comparing.
Early repayment charges	A charge for early repayment of a mortgage with a special initial deal.	Again, specific mortgages either have these or they don't. Some mortgages charge fees only as long as any special rate lasts – others charge if you change mortgage for up to 3 years after the deal ends. If you may need to move, it's best to avoid loans with extended repayment charges.
Valuation fees	Pays a surveyor to value the house as part of the mortgage application.	This isn't a comprehensive survey – so get one of these, too (unless you're remortgaging). Some lenders refund your valuation when the mortgage goes through.

Guide to mortgages brought to you by LowerMyBills from Experian

The LowerMyBills guide to mortgages was created to help you understand the types of mortgage deals, ways to repay your mortgage, special mortgage features and mortgage fees, giving you the information you need to help choose the right mortgage for you.