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Mortgage Types

Most lenders have a basic rate which they charge, which is linked to the market rate set from time to time by the Bank of England. The mortgage will fluctuate as market rates are changed, and your monthly payments will be altered in line with the new rate.

A lender may offer a fixed rate over a set period of time, which means that your payments will remain stable during the fixed period. Once the period expires your payments normally revert to the standard variable rate. Sometimes the lender will charge a penalty if you repay your loan early.

Some lenders offer a percentage discount off the variable rate for a set period of time. This means you will receive a reduced payment during the set period, and at the end of the period your payments will revert back to the standard variable rate. These mortgages still tend to fluctuate, but are normally cheaper during the initial period. Similar to fixed rate mortgages these schemes normally include a penalty if you repay the mortgage early.

A capped rate is similar to a fixed rate mortgage, but the rate will not increase if interest rates go up, but if interest rates fall your rate will reduce as well. These schemes normally include a penalty if you repay your loan early.

These mortgages are normally based on the standard variable rates, but if you agree to stay with the lender for a set period of time, the lender will give you a cash sum on or soon after completion of your purchase. These schemes normally include a penalty, repayment of the cashback, if the mortgage is repaid early. Sometimes cashbacks can be mixed with discounted or fixed rate mortgages.

With a flexible mortgage it is normally charged at the standard variable rate, but the lender allows you to overpay, thereby reducing the interest you are charged, or borrow back the overpayments should a need for the money arise. Schemes vary considerably, and the benefits must be closely examined before you proceed.

If you commit yourself to a scheme which includes a penalty do make sure that the scheme is "portable" so that you can take the mortgage with you to a new property should you move house within the scheme period.

Repaying A Mortgage

There are two ways of repaying your mortgage.

Capital & Interest - With this scheme, you repay the interest plus a portion of the capital, reducing the outstanding balance monthly until the mortgage is repaid.

Interest Only - With this scheme, you repay the interest each month, but at the end of the term the capital borrowed remains outstanding. You will need to arrange some type of savings or investment plan to run over the same period as the mortgage, which will repay the mortgage once the plan matures. Most common types of repayment vehicle are an endowment policy, a pension plan, or an Individual Savings plan. These plans should be regularly reviewed to ensure that they will have sufficient value to repay the mortgage balance.