Your mortgage options

There are two ways to repay your mortgage.

Repayment (capital & interest)

Each month you repay your lender an amount that includes both interest on the mortgage and a portion of the capital. During the first few years, most of your payment consists of the interest part, with the capital balance reducing slowly. Over time, the amount of interest payable each month reduces, so more of your payment goes towards repaying the actual debt.

The benefit of a repayment mortgage is that you can be sure your debt will be cleared by the end of the term. That is, providing you maintain the repayments throughout.

Interest-only mortgages

With an interest-only mortgage, your monthly payments only cover the interest due, making no payment towards the capital. This means that you will always owe the same amount, assuming interest payments are kept up to date throughout the term of the mortgage. You will need to have alternative arrangements to avoid the property having to be sold at the end of the term.

Typically clients taking out this type of mortgage will also invest in an investment scheme, such as an endowment, OIEC, stocks and shares ISA, or Unit Trust/OEIC, with the assumption that over time, capital will grow within it to eventually provide enough value to repay the mortgage. Future windfalls or lump sums expected from pensions or inheritance can also be used when a person cannot afford to repay the capital in the short term.

This type of mortgage is common when buying property to let out. The Buy-to-Let mortgage relies upon the growth in the property value to provide both enough capital to repay the mortgage when eventually sold, and hopefully, a profit.

Interest repayment options

The standard mortgage interest repayment options currently available include the standard variable rate (SVR), tracker rate, discount rate, fixed rate and capped rate.

Standard variable rate (SVR)

This is the lender's basic lending rate, which generally follows fluctuations in the Bank of England Base Rate and general market conditions. Most borrowers move onto this rate once any initial special offer period has ended and often forget to move again.

If your mortgage has reverted to the SVR rate remember to call one of our advisers on 07789 900359.

The main advantage of a SVR mortgage is that there are no early repayment charges. Unfortunately, the rate can be much higher than other deals on offer. The unpredictability of interest rate changes can also make it hard to plan your finances. This is particularly the case when the cost of your mortgage payments rapidly spiral as interest rates go up. Even when the Base Rate decreases lenders are typically reluctant to pass on any savings in the short term.

Tracker rates

These work in the same way as SVRs. However, instead of the fluctuations being determined by the lender alone, the interest generally mirrors a rate that is set by the Bank of England.

The interest rate is guaranteed to reflect movements in the Base Rate almost immediately. For this reason tracker mortgages often have heavy early repayment charges in the earlier years. Also, when the Bank of England Base Rate rises, your mortgage payments will increase.

Discount rates

This is like a variable rate in that it usually follows the lender’s SVR. However, it does so at a set discount and for a set period – usually, the shorter the discount period, the greater the discount.

The initial discount will usually provide a cheaper rate making mortgage repayments less than for a standard tracker. Unfortunately, the rate will revert to the lender’s SVR at the end of the discount period. There may be a tie-in beyond the initial discount period. Early repayment charges are often very high for such mortgages.

Fixed rates

Here the rate is fixed for a given period of years ranging between two years and the full lifetime of the mortgage. The typical span ranges between two and five years. They can be worth considering when mortgage rates are perceived to be very low, with the potential for rises in the short to medium term.

Such mortgage products are usually very competitive so there will be lots of choice. With a fixed-rate mortgage, the cost of the mortgage will remain static throughout its lifetime. However, if the Bank of England Base Rate falls you could be tied to an uncompetitive rate. Early repayment charges can still apply even after the fixed period has ended. The initial fees can sometimes make the reduced rate less beneficial than other types of deal, even if they are added to the loan.

Capped rates

Rates for this product will not rise above a certain agreed level. Like the fixed-rate mortgage this will protect you from rises in the interest rate, but it also enables you to take advantage of drops in the Bank of England Base Rate. The capped rate, however, is generally higher than a fixed rate for the same period.

If you’d like any further information, or you’d like to talk things over with a mortgage adviser, please get in touch on 07789 900359.

“I didn’t think I would ever get on the mortgage ladder but Angela at Penda came up with a
radical plan and now I have my first home.” Ms Singleton, Wallsend

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Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.