The biggest threat to borrowers

A terrifying new survey shows that when it comes to mortgages, ignorance is rife.

I remember about two years ago going through how a mortgage worked with my other half. I had a bit of a head start in truth, given I had been a mortgage journalist for a couple of years by that point, but even I wasn’t 100% confident. We were first-time buyers, and so while I was completely au fait with the theory, I’d never seen a Key facts Illustration in my life.

It was all very new to us.

I thought back to that experience this week, when I saw some research which confirms just how ignorant many of us are about the world of mortgages.

Talk me through a tracker again

According to a study by First Direct, a frankly terrifying 92% of people planning to take out a mortgage in the next 12 months do not completely understand the difference between the main types of mortgage.

Incredibly, only a quarter of borrowers (26%) who already have a mortgage feel they completely know the difference between the various types of mortgage, even now!

So let’s take a look at what's got us all flummoxed.

The safety of fixing

A fixed rate mortgage, as the name suggests, is one where the interest rate on your loan stays at a set level for a specified period of time. So, for example, if you have a two-year fixed rate, the interest rate will be fixed at that level for two years, if you have a five-year fixed rate, the rate is fixed for five years, and so on.

Tracker rates

Which brings me to tracker mortgages. Again the name is a clue – they track the Bank of England’s base rate, which is currently 0.5%. So if you have a two-year tracker, which tracks base rate plus 2%, right now you’ll be paying a rate of 2.5% interest on your mortgage.

However, every time the Bank of England raises bank base rate within those two years, your monthly repayments will rise as well (similarly, if they cut base rate, your payments will fall, but with the base rate at such a low level we are unlikely to see any rate cuts for some time).

These do not offer the same security as fixed rate deals, as your mortgage repayments can vary from month to month, but if you get the timing right (and a decent rate to boot) they can work out a great option.

Term trackers

These work on the same basis as a normal tracker mortgage, except that the rate of interest (base rate plus 2% for example) is set for the entire life of the mortgage.

John Fitzsimons explains why the best mortgages offer you a bit of flexibility

So with a two-year tracker, once you get to the end of the two years, you will usually move to the lender’s SVR or a more expensive tracker rate, but with a term tracker (or lifetime tracker as they are sometimes known) your interest rate will continue to track base rate at a set distance for as long as you have the mortgage.

Discounted mortgage

A discounted mortgage is again a variable mortgage (in that the rate of interest you pay can change), however it does not track bank base rate. Instead, the rate of interest you pay will usually be a discount from the lender’s SVR.

So these rates may look really enticing, but the rate you pay can move upwards at any time, irrespective of what is happening with the base rate.

Capped mortgage

Another form of variable mortgage, these will move up and down with base rate, but never beyond a specified ceiling rate.

Getting advice

Even though I knew a thing or two about mortgages, I still opted to use a mortgage broker when I bought my house. And for me, the research from First Direct really emphasises just how important it is to use a broker. If you are at all unsure of how a certain type of mortgage works, don’t just rely on doing some reading online – speak to a mortgage broker!

They can not only explain how the mortgage will be structured, but also work out which form of mortgage is best for you, based on both your attitude to risk and which lender’s criteria you are most likely to meet. They may also have access to mortgages you can't get direct.

To have a chat with one of our fee-free advisers, head over to our mortgage centre where you can pick their brains over the phone, by email or via instant messenger.

15 fabulous fixed rates

Lender	Term	Interest rate	Maximum loan-to-value	Fee
Principality BS	Two-year fixed	2.24%	75%	3%
ING Direct	Two-year fixed	2.79%	60%	£945
First Direct	Two-year fixed	2.99%	65%	£99
ING Direct	Two-year fixed	3.09%	75%	£945
Marsden BS	Two-year fixed	3.49%	80%	£598
Post Office	Two-year fixed	3.94%	85%	£995
Coventry BS	Three-year fixed	3.39%	65%	£999
Mansfield BS	Three-year fixed	3.49%	75%	£999
Accord Mortgages	Three-year fixed	3.59%	75%	£995
Market Harborough BS	Three-year fixed	3.69%	80%	£800
HSBC	Five-year fixed	3.94%	60%	£99
Mansfield BS	Five-year fixed	4.14%	75%	£999
Norwich & Peterborough BS	Five-year fixed	4.64%	80%	£995
Yorkshire BS	Ten-year fixed	4.99%	75%	£495
Accord Mortgages	Ten-year fixed	6.19%	85%	£995

15 tremendous trackers

Lender	Term	Interest rate	Maximum loan-to-value	Fee
Cheltenham & Gloucester	Two-year tracker	1.99% (tracks base rate + 1.49%)	75%	2.5% of advance
The Mortgage Works	Two-year tracker	2.14% (tracks base rate + 1.64%)	70%	2% of loan
First Direct	Two-year tracker	2.19% (tracks base rate + 1.69%)	65%	£99
Royal Bank of Scotland	Two-year tracker	2.39% (tracks base rate + 1.89%)	60%	£0
Halifax	Two-year tracker	2.49% (tracks base rate + 1.99%)	75%	£995
Loughborough BS	Two-year discount	2.69% (tracks lender’s SVR – 2.30%)	80%	£495
ING Direct	Two-year tracker	3.29% (tracks base rate + 2.79%)	80%	£945
Yorkshire BS	Two-year tracker	3.49% (tracks base rate + 2.99%)	85%	£495
Saffron BS	Two-year discount	3.69% (tracks lender’s SVR – 1.70%)	85%	£595 for loans up to £250k, 0.5% of advance for larger mortgages
HSBC	Term tracker	2.19% (tracks base rate + 1.69%)	60%	£99
First Direct	Term tracker	2.39% (tracks base rate + 1.89%)	65%	£99
ING Direct	Term tracker	2.65% (tracks base rate + 2.15%)	75%	£945
Bank of China	Term tracker	2.80% (tracks base rate + 2.30%)	80%	Between £995 and 0.5% of advance, depending on loan size
First Direct	Term tracker	2.89% (tracks base rate + 2.39%)	75%	£99
HSBC	Term tracker	3.39% (tracks base rate + 2.89%)	80%	£399

More: The worst mortgage lenders in the country! | Ditch Britain for somewhere better!

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.