Which Type of Mortgage

Out of more than 2,000 mortgage products available, how do you know which one is right for you? It's not as daunting as it sounds. Once you've decided which type of mortgage deal you would like, you can start to narrow down the choices.

To encourage you to choose one of their homeloans, each lender offers a raft of special offers and incentives. There's nothing to stop you from taking advantage of one of these offers. What you do have to do, however, is make sure that the one you pick suits your circumstances.

Below is a summary of the different sorts of mortgage deal which should give you an idea of which types of borrower they suit.

Fixed rates	Capped rates	Discounted rates
Base-rate trackers	Cashbacks	100 percent loans
Flexible mortgages	Penalties and fees

Fixed rates

With this kind of deal you can guarantee the level of your monthly repayments for a set period of time. The rate of interest you pay is the same throughout the period of the fixed rate - for example, 5.50 per cent for three years - so you know exactly how much your mortgage will cost.

The potential disadvantage of this product is that the lender's standard variable rate (SVR) - the basic rate you would pay if you didn't have a special offer rate - may fall below the level of your fixed rate. But, if you know money is going to be tight during the first few years of owning a home, then a fixed rate gives you the security of being able to budget.

The most generous fixes are available over shorter time periods - one to three years. However, there are fixed rates over most time periods, with some longer-term fixes lasting 15 years or more.

Capped rates

Like fixed rates, capped interest rates have a set upper limit, but below that the rate you pay fluctuates in line with the lender's SVR. So you get the best of both worlds - a maximum rate so you can be sure your payments won't rise and rise, but the ability to take advantage of falling interest rates, should they occur.

The catch is that most capped rates are set too low for the SVR to be likely to fall below them. And because they're not as generous as fixed rates, you could end up paying more than if you had chosen a fixed rate.

Discounted rates

This is a type of variable rate offered for a set period, where the lender's SVR is reduced by a set percentage. For example, a 2 per cent discount on a variable rate of 6.85 per cent means that you pay 4.85 per cent for the offer period. If the standard variable rate changes, so does the rate you pay, although you'll always be paying 2 per cent less than the variable rate during the discounted period.

Discounts are particularly good news if interest rates are falling - whatever everyone else is paying, you'll be paying less. You still pay less when rates are rising, but you don't have any control over how high they will go.

Base-rate trackers

These are a variation on the discounted rate idea. The rate you pay is at a set margin above the Bank of England's base rate and changes as the base rate changes. On the plus side you don't have to rely on your lender dropping its mortgage rate in line with any cuts in base rate. On the minus side the rate you pay will automatically rise if the base rate rises, regardless of whether your lender may have decided not to increase its mortgage rate by the same amount.

Choosing this type of mortgage means you do have to be prepared to take the rough with the smooth. The Bank of England Monetary Policy Committee meets every month to discuss whether the base rate should rise or fall or stay where it is, and keeping the level of people's mortgage repayments down is not its main priority. Potentially, then, the rate you pay could change every month.

Cashbacks

Getting a tax-free lump sum with your mortgage was a popular incentive when it was introduced a few years ago. But you are inevitably tied in to the lender's SVR as a result, which means you could be stuck on that rate for a number of years, having spent the money within weeks of moving in.

You receive a cash lump sum on completion of your mortgage, which is either a percentage of the loan or a set amount, and this can be useful to buy furniture and appliances. But you may be better off taking out a cheaper mortgage and a loan to buy the furniture.

100 per cent loans

If you're unable to come up with a deposit then you could get a 100 per cent loan. While you'll pay more each month in interest because you've borrowed more, you're able to buy a home when you need to without waiting to save up your money.

You may have to pay a higher lending charge for not paying a deposit, which is based on the cost of the property. The lender may let you add it to the loan, but that means you'll have to pay interest on it.

Flexible mortgages

In the last few years lenders have decided to combine lots of flexible elements to create a new product, called the flexible mortgage.

Each provider has a different definition of what makes a mortgage flexible. You can expect to find some or a combination of the features described below.

• regular and lump sum overpayments - allowing you to increase your repayments and pay off your loan early
• underpayments - you may only be able to do this once you've built up a reserve of overpayments
• payment holidays - this may be subject to the length of time you've been paying the mortgage
• lump-sum withdrawals - you can draw down capital up to the limit of the total loan or your overpayment reserve
• flexible payments - the ability to make ten equal payments in a year, for example, or pay weekly or fortnightly
• daily calculation of interest - interest on the balance is implemented daily, which takes into account immediately any changes in the outstanding balance
• current account facilities - you can place your monthly salary into the account to maximise the advantage of daily interest calculation
• offset facilities - keeping several accounts with the same lender, including savings, personal loan and credit card.

The main advantage of a flexible mortgage is that you can shape it to suit your present and future needs. Making regular overpayments on your mortgage means you can pay it back earlier, cutting years off the term and saving a huge amount of interest. Underpaying allows you to pay less when money is short - you may even be able to take a payment holiday.

Some flexible mortgages have current account facilities, allowing you to combine your ordinary financial transactions with your mortgage. You pay your salary into your mortgage account, it then works like your bank account. The interest rate may be higher than that of a fixed or discounted rate, but many flexible lenders allow you to pay off any existing loans and credit cards and add them to your mortgage. As long as you have enough equity in your property, you could borrow more to fund home improvements. This extra borrowing is usually charged at the same rate as your mortgage.

Some mortgages have offset facilities too. This means that you will have several accounts which will attract interest at the mortgage rate. You can set limits so that if the balance of your account goes above a certain level it will automatically be swept into a savings account to earn more interest. Similarly, when your account is running low, money will be swept back, topping up your account to cover regular payments.

You do have to be disciplined, because any money borrowed, is borrowed against your home, which you could lose if you can't make up the deficit. Also, there's the possibility that in the event of falling property prices borrowers could find themselves in a position of negative equity.

If you are the sort of person who has even just a few pounds left at the end of the month, a flexible mortgage could work for you. But if you have a large overdraft and are always short of money, this type of mortgage will not be suitable. Flexible mortgages may not be suitable for first-time buyers borrowing 95 to 100 per cent of their property's value as they tend not to have the funds to take advantage of the flexible features.

Penalties and fees

The other thing to watch for is early repayment charges. Most special offers last for a set period of time. To stop you flitting from one offer to another without paying back a sufficient part of the loan, lenders will usually impose a fine if you change lenders or pay off your loan within the offer period. If you do decide to leave the lender early, you could be asked to pay three to six months' interest or pay back the value of the cashback or reduced rate you have enjoyed.

If you think the deal is too restrictive and you're not sure what you'll want to do in the future, then to avoid paying early repayment charges you should consider some other offers.