The more typical mortgage types and interest rates arrangements are briefly explained here. This is by no means a complete list and it is not intended to give a complete explanation, or to answer all your questions. Details are included here in order that you might be better prepared to take full advantage of the service offered to you when talking to the mortgage advisor.
We do not believe that an explanation given here could replace or compete with a more detailed discussion with an advisor.
Interest Only Mortgage
The agreed monthly payments go towards paying off the interest charges only. If the agreed monthly payments are made on time then the mortgage balance will not be reduced and the outstanding amount remains constant. Typically money is paid into a separate investment which it is intended will grow to produce a capital sum required to repay the mortgage and the ability to repay the mortgage depends upon the performance of the investment.
Repayment Mortgage
Also known as a Capital & Interest Mortgage. As the name implies, monthly payments include an amount to repay the capital sum as well as interest charged. If the agreed monthly payments are made on time throughout the lifetime of the mortgage, then the mortgage will be paid off at the end of the agreed period of the loan. It is normally possible to make additional payments that will shorten the period of the mortgage, or allow a reduction in payments at a later time. Payment made early in the life of the mortgage go more towards clearing the interest charged and more significant repayment of the capital occurs later in the term of the mortgage.
Standard Variable Rate
This is the most common type of interest payment. The amount paid each month is set by the Lender and is adjusted according to general market conditions and the Bank of England Base Rate. It is the rate to which a mortgage will revert on expiry of any special discounted or fixed rate period. Each Lender sets its own rate.
Fixed Rate Mortgage
A fixed rate is set for a number of years. During this time the interest rate will remain unchanged regardless of the changes to the Bank of England Base Rate and the Lender’s Strandard Variable Rate. At the end of the fixed period the mortgage reverts to the Lender’s Standard Variable Rate. Typically the mortgage has a redemption penalty period that extends to the end of the fixed rate period or beyond.
Discounted Rate Mortgage
The interest rate charge is lower and pegged to the Lender’s Standard Variable Rate. The interest rate will remain discounted by the agreed margin throughout the agreed period of the discount. At the end of the discounted period, the mortgage reverts to the Lender’s Standard Variable Rate. Typically the mortgage has a redemption penalty period that extends to the end of the discounted rate period or beyond.
Cashback
Offered by Lenders as an incentive to attract new borrowers, a cash sum is given to the borrower when the mortgage starts. It is often given instead of any other incentive. The cashback amount varies. Typically, in the first few years, the cashback amount, or at least a proportion of it must be repaid in the event of an early redemption of the mortgage.
Flexible Mortgage
Using a “daily interest rate” calculation, the main feature of a flexible mortgage is the facility to make over-payments, and in some circumstances, underpayments also. Payment holidays and lump sum withdrawals may also be available.
Current Account Mortgage
Instead of having a separate mortgage account and a separate bank account, often with a different bank, the two can be combined into one account. This means that when your salary is paid in it reduces the balance owed and when you spend money, the balance owed increases. The original loan has to be repaid in the same way as other mortgage repayment or interest only mortgages. Subject to repaying the mortgage on time it means that other borrowings that might have been placed on a more expensive credit card can be added to the account, but if these sums are then repaid over a longer period, then more interest may be paid in the long run. Any savings that might otherwise have gone into a separate account are used instead to reduce the outstanding balance and so instead of interest gained, the amount of interest paid is reduced – which can be advantageous depending on what tax might otherwise have been due on interest on savings. However the interest rate charged tends to be higher than on the best deals available on traditional mortgages.
Offset Mortgage
An offset mortgage is similar to a Current Account Mortgage, but the mortgage account is kept separate from other accounts such as a current account, savings account and credit card and other loans. One or more of these other accounts can then be offset against the mortgage account.
Capped Interest Rates
A Capped Interest Rate mortgage has, for an agreed period, a ceiling interest rate above which the Lender cannot increase the interest rate, regardless of changes to the Bank of England Base Rate, or the Lender’s Standard Variable Rate. Unlike a fixed rate mortgage, the interest rate charge can fall if the Lender lowers its Standard Variable Rate. Normally the longer the period for which the interest rate is capped, the higher the rate at which the cap is fixed. Like other discounted or fixed rate mortgages, there is frequently a redemption period included beyond the period of the agreed cap.
Base Rate Tracker
Lenders do not always immediately adjust payments for borrowers following a change in the Bank of England Base Rate, particularly when there has been a rate reduction. With a Base Rate Tracker the interest rate is pegged to the Bank of England Base Rate and is adjusted immediately any change occurs. Repayment for Tracker mortgages are calculated on a “daily interest” basis.