How to choose a mortgage

The mortgage market has changed hugely as a result of the financial crisis. Though the Bank of England has slashed interest rates to record lows, which should be great news for borrowers, life isn't all rosy in the mortgage world.

There is a severe shortage of funding available for mortgages because of the ongoing financial crisis. As a result, there is less choice for borrowers and lenders are more picky about who they'll offer loans to.

Despite the fact there are fewer products, the mortgage market is more complicated than ever. So if you've no idea whether you should be going for a fixed or variable rate, percentage or flat rate fee or even whether you'll get a mortgage, don't worry, you're not alone.

Here we explain the basics so that you'll be better informed when it comes to making the decision about what type of deal to go for.

Broadly speaking there are two types of mortgage deals: fixed rate and variable rate.

Fixed rate mortgages

Fixed rate mortgages charge a set rate of interest for a certain period - often two, three or five years. You can fix your mortgage rate for longer but most people tend not to for reasons that will be explained below.

Once the fixed rate period ends you will move onto a variable rate - at this point it is usually worth remortgaging onto a new deal.

Advantages: The main advantages of a fixed rate mortgage are that you know exactly what your mortgage payments will be and you are protected from any increases in interest rates during the fixed term. Fixed rates therefore tend to be popular with those who need to budget carefully or who just prefer the peace of mind an unchangeable rate of interest gives.

Disadvantages:
You are usually tied into the mortgage throughout the fixed term and will be charged an 'early redemption charge' (ERC) if you redeem your mortgage during that time.

It is for this reason that most borrowers tend not to fix their mortgage for longer than five years because so much can change - interest rates may plummet (as has been seen recently) leaving you stuck on an uncompetitive rate, or your circumstances may change meaning you need to get out of your mortgage deal.

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