Your monthly payment with an interest only mortgage will only pay the interest charges on your loan. So if you are paying an interest only mortgage, you are not actually ever reducing the loan amount itself.

It is important for you to arrange another form of savings or investment alongside an interest only mortgage so that you are able to pay back your loan at the end of the mortgage term. If you do choose this option you will need to check that your investment plan will grow accordingly so that you may pay off your loan at the end of the term.

Your monthly payments will be lower than if you were to take out a repayment mortgage.

The loan that you have originally borrowed will not be being paid off on a regular basis and so the debt will not actually get paid off unless you set up a secondary form of savings or investment.

Every month your mortgage payments to the lender will be paying both interest on the loan and will be reducing the loan amount itself. So every month you will be paying off a small amount of your loan.

It is a simple and clear approach and you know that your loan is getting smaller with every payment that you make.

In the early years of the mortgage term the payment will be mainly interest, so if you want to repay the mortgage or move house in the early years you will find that the amount which you owe will not have been reduced by very much.

With a fixed rate mortgage the rate of interest on your mortgage loan is fixed for a predecided period of time, e.g. two years. A fixed rate mortgage means that the interest rate on your mortgage will stay the same irrespective of changes to the Bank of England interest rate.

Fixed rate mortgage schemes generally last for a period of two to five years, although longer terms are sometimes available. At the end of the fixed rate term the interest rate on the mortgage then reverts to the lenders standard variable rate.

It is a simple and clear approach and you know that your loan is getting smaller with every payment that you make.

In the early years of the mortgage term the payment will be mainly interest, so if you want to repay the mortgage or move house in the early years you will find that the amount which you owe will not have been reduced by very much.

A variable rate is based on the lenders standard variable rate.

The lenders standard variable rate is normally affected by changes in the Bank of England's base rate. Standard variable rates vary between lenders but normally rates are between 1.5% and 3.5% above the Bank of England base rate.

A standard variable rate is not guaranteed to rise and fall by the same rate that the Bank of England base rate changes by. If you would prefer to have this guarantee then a tracker mortgage may be of interest to you (see below for more information).

You have the freedom to change your mortgage provider at any time without being penalised. When the Bank of England base rate falls you will then benefit from a low rate of interest on your mortgage loan.

If the Bank of England base rate rises then your mortgage interest rate will also rise. Your ability to budget is reduced as you will not always know how much your mortgage payments are going to cost. Lenders also do not always pass on the same movement as in the Base of England's base rate.

Tracker mortgage rates always follow the Bank of England base rate at an agreed differential. This mortgage rate is available for a fixed period of time or for the whole life of the loan.

The most common tracker rate term is two years but lenders do offer 3, 5 and 10 year tracker rate mortgages.

There will be a lower interest rate than the lender's standard variable rate in the first few years. You will also benefit from all of the falls in the Bank of England base rate.

Early repayment fees can be very expensive. If the Bank of England base rate increases your payments will increase with it and so it is not as easy to plan and to budget.

A capped rate mortgage is similar to a fixed rate mortgage as it will not rise above a certain rate which is known as the cap.

If the lender's standard variable rate falls below the capped rate then your interest rate will fall with it. If the lender's standard variable rate rises above the capped rate, you will only be paying the capped rate. Many capped rate mortgages will have a minimum rate that they will reduce to - this is known as a throated mortgage.

You will benefit from low interest rates and not rise above the agreed cap rate during the capped rate period.

Capped rates are normally higher than equivalent fixed rates. Early repayment fees can be expensive. You may need to pay an application fee for a capped mortgage which can be expensive.

A discounted variable rate mortgage is where the lender will offer a discount on the standard variable rate for a set amount of time after which the rate would then revert to the standard variable rate. During this set time period the discounted rate will rise and fall with the lender's standard variable rate.

Discount rate mortgages can sometimes have extended periods of early repayment penalties, or can charge very expensive setup fees so be sure to check all of these things if you are considering a discount rate mortgage.

You will have a lower rate of interest for the discount period. Your mortgage payment will reduce when the lender's standard variable rate falls.

Early repayment fees and setup fees can be very expensive. At the end of the discount period the rate will revert back to the lender's standard rate.

A cash back mortgage is where a cash lump sum is paid to the applicant on completion of a mortgage.
There are two main ways that a cash back mortgage can be offered by a lender:

1. Cash back mortgage with a lenders standard variable rate:

This can offer a large amount of cash back on completion of the mortgage. This cash back can be as high as 6% of the new mortgage amount and can be used by the customer for any purpose. The payment is usually made two to three weeks after the mortgage has completed making it difficult to use this money for a deposit.

2. Cash back mortgage offered alon with another mortgage product:

This is where the cash back mortgage is offered alonside another product such as a fixed rate mortgage. The cash back paid is usually a small amount to cover for example the refund of a valuation or contribution to solicitor costs.

The cash can be useful at a time where you may have had to pay out a lot of money.

Early repayment fees and setup fees can be very expensive and will be applicable for a long period of time if the cash back paid is a large amount. You may have to pay a fairly expensive application fee. Interest rates on these mortgages do tend to be higher.

Flexible mortgage schemes let you overpay and underpay on your monthly repayements without being penalised. You can then adjust your current financial situation to the mortgage payments you choose to make.

When you have an extra bit of money you can pay off some more of your mortgage, or when you don't have as much money you can underpay or even skip a payment. You can also borrow money against the capital repaid.

Not all flexible mortgage products are the same. Some will not let you overpay as much as others during a set period.

Restrictions may also apply if you want to borrow against the capital already paid back. If you are considering doing this you should check how easy it will be to get to the cash that you need.

You can pay off your mortgage early or make overpayments without being penalised. You can borrow against capital you have paid off or equity in the property more easily and at a lower rate of interest than a standard loan. You will be able to change mortgages at any time without any early repayment fees or penalties.

Making too many underpayments or skipping payments will mean that the mortgage repayment period will be longer. This type of mortgage requires a disciplined budgeting approach.

Offset mortgages allow you to put all of your money into the same place - mortgage, loans, savings and current account. This allows you to have flexibility. It also gives you the security of being able to see and manage your finances all in one place.

You pay a single low interest rate on everything that you borrow - mortgage, loans and credit cards. You get a really good return on your savings and the money that normally sits idle in your bank account - and with no tax to pay! You will get complete flexibility on overpayments to your mortgage and you have full access to all your money.

There is no stability in this mortgage if you compare it to a fixed rate mortgage. Interest rates are often higher than discounted rate mortgages.

Libor mortgages track the London Inter Bank rate as opposed to the Bank of England base rate.

Most lenders who offer this are sub-prime self-cert lenders. Most LIBOR mortgages are a variable rate and have a three monthly rate review.