Mortgages Explained
There are so many mortgages for you to choose from. This guide is a quick jargon buster to help you understand the language out there.
Repayment
What is it?
You pay off the capital (the amount you borrow) and the interest over a set period of time.
Advantages
At the end of the mortgage period you own your home and have paid off all the loan.
Disadvantages
Monthly payments can be higher than other types of mortgage.
Interest Only
What is it?
You only pay off the interest on your mortgage and not the actual mortgage loan amount.
Advantages
Monthly payments can be lower than other types of mortgage.
Disadvantages
You never pay off the amount you owe and do not own you home at the end of the mortgage term.
You may need to make separate arrangements to pay off the loan when the mortgage ends. If you don’t you could lose your home.
Fixed Rate
What is it?
Interest rate stays the same for a set period i.e. 1, 2, 5 or 10 years.
Advantages
Your mortgage payments will stay the same every month for the set period so you know exactly what you have to pay. This is good for budgeting.
Disadvantages
You never pay off the amount you owe and do not own you home at the end of the mortgage term.
You are tied to that rate for that set period so if interest rates fall you will be paying more than other offers.
If you want to end the mortgage before the set period you may have a hefty penalty to pay.
Variable Rate
What is it?
Interest rate is linked to the lender’s rate, so if the lender’s rate changes so will the amount you pay.
These mortgages can also be arranged for a set period.
Advantages
The rates tend to be lower than fixed rate deals so your mortgage monthly payments could be lower each month.
Disadvantages
Your lender can change its rate at any time. The amount you pay will change if your lender decides to change its rates. This can be unexpected.
Your monthly payment could go up or down. It’s important to know that if the rate goes up you can still afford your monthly payments.
Tracker
What is it?
Interest rate is linked to the Bank of England rate so if the base rate changes so will the amount you pay.
These mortgages can also be arranged for a set period.
Advantages
The rates tend to be lower than fixed rate deals so your mortgage monthly payments could be lower each month.
Your payments only change if the Bank of England changes their base rate.
Disadvantages
Your monthly payment could go up or down.
It’s important to know that if the rate goes up you can still afford your monthly payments.
Discount
What is it?
Like a variable rate but the lender ‘discounts’ a set period i.e. 1, 2, 5 or more years.
After that set term, the interest rate is linked to the lender’s rate, so if the lender’s rate changes so will the amount you pay.
These mortgages can also be arranged for a set period.
Advantages
Initially and for a set period of time you have a discounted monthly payment.
The rates tend to be lower than fixed rate deals so your mortgage monthly payments could be lower each month.
Disadvantages
Your lender can change its rate at any time. The amount you pay will change if your lender decides to change its rates. This can be unexpected.
Your monthly payment could go up or down. It’s important to know that if the rate goes up you can still afford your monthly payments.
Offset
What is it?
If you have savings you can use the interest earned from your savings to pay for part of the interest owed on your mortgage.
These mortgages can be fixed or variable.
Advantages
Can reduce the number of years (the term) you have to pay your mortgage for because you pay it off more quickly.
Some lenders allow you to link the mortgage to your current account as well as your savings.
If you offset the interest on your savings there may be no tax on the interest you earn.
Disadvantages
Capped Rate
What is it?
Capped rate interest rate is linked to the lender’s rate. If the lender’s rate changes so will the amount you pay. However this rate is capped at a certain level so it can’t go any higher.
These mortgages can also be arranged for a set period.
Advantages
The rates tend to be lower than fixed rate deals so your mortgage monthly payments could be lower each month.
You have some security in knowing that you monthly payment will never go over a certain amount which helps with budgeting.
Disadvantages
Your lender can change its rate at any time. The amount you pay will change if your lender decides to change its rates. This can be unexpected.
Your monthly payment could go up or down. It’s important to know that if the rate goes up you can still afford your monthly payments.
More Information
If you would like any further information on the different types of mortgage types, please discuss this with the team on 0800 044 5733 or use the ENQUIRY FORM below.
