A mortgage is a method of using property as security for the repayment of a loan. It is a long-term loan which is obtained from financial institution and if the borrower cannot make repayments as agreed, the property is taken by the lender as full repayment of the loan. The loan amount therefore will only be as much as the property is worth.

The UK mortgage and remortgage market has become incredibly competitive and mortgage providers often offer special deals as an incentive for borrowers to take out a mortgage or remortgage their property with them. These deals are usually in the form of short-term introductory benefits such as a discounted interest rate, a fixed interest rate or a capped rate for a certain period of time. Lenders want borrowers to stay with them for as long as possible and so enforce penalties if they want to pay off their mortgage early or switch to another lender after the discounted period.

The two main types of mortgage are repayment and interest-only. With a repayment mortgage the lender is repaid gradually during the term of the mortgage, whereas with an interest-only mortgage the borrower only pays the monthly interest of the mortgage and puts the rest into a repayment vehicle when can be used to pay off the outstanding debt when it matures.

There are five types of interest rate which a borrower can choose from; fixed-rate, variable-rate, capped-rate, tracker and discounted. With a fixed-rate the interest rate is set for a certain length of time, usually 1 to 5 years. After this set period the rate usually reverts to the variable rate. The advantage of this type of rate is that a borrower will know exactly what he owes each time and so can budget accordingly. The disadvantage is that if interest rates in general drop then the borrower could end up paying a lot more than he/she needs to.

A variable-rate is where the Bank of England sets a standard interest rate and the mortgage lender sets their rate at just above this rate, usually about 1 or 2%. This is where lenders get competitive to offer the lowest rate. If the base rate goes up so does the variable rate and vice versa. Capped-rate mortgages are said to offer the best of both variable and fixed rate deals. They are therefore very competitive and not offered by every lender. A limit is agreed on the maximum amount of interest the borrower will pay in a certain period of time. At the same time the rate will drop if the variable rate drops. The borrower will benefit if interest rates falling and will also know the maximum they are likely to pay.

A discounted rate is one method used by lenders to attract new borrowers. The lender will offer a discount on the standard variable rate for a set period of time. After this the rate will revert back to the standard variable rate. Lenders prevent borrowers from switching to new plans with other lenders by charging penalties for early repayment etc.

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