Mortgages

An Introduction

Mortgages are one of the largest single transactions in most people’s lives. Buying a property can be a stressful and time-consuming experience, although nowadays the financing of a mortgage is a case of finding and selecting the most suitable deal, rather than simply accepting a lender’s offer.

Hundreds of banks, building societies, and smaller niche lenders compete for your business, all offering a variety of interest rate deals, associated fees, and other enhancements to attract borrowers.

There remain two main methods of repaying a mortgage loan, and it is possible to set up the mortgage on a ‘part repayment and part interest only’ basis. A description of these methods is provided below.

Repayment (capital and interest) Mortgages

Under a repayment mortgage, your monthly repayments consist of both interest and capital hence, over time, the amount of money you actually owe will decrease. In the early years, your repayments will be mainly interest and therefore the capital outstanding will reduce slowly in the early years.

Whilst this method ensures that the mortgage is repaid at the end of the term providing all payments are made on time and in full, it is generally more expensive at the start.

Interest only mortgages

As their name suggests, with an interest only mortgage you only repay the interest on the mortgage. At the end of the term the capital is still outstanding. Therefore you will usually need to take out some kind of investment policy to save up enough money to repay the mortgage at the end of the term.

Traditionally the preferred product for repaying the capital of an interest only mortgage was a mortgage endowment policy (which included a set amount of life cover) – although more recently customers are using Individual Savings Accounts (ISAs) and pensions to build up a sufficient sum and taking advantage of the tax breaks offered by these products.

There are also several terms used to describe the interest you pay on a mortgage, and the key terms are as follows...

Fixed-Rate

A fixed-rate mortgage allows you to repay interest at a fixed rate, irrespective of any base rate fluctuations. In other words, your monthly repayments will remain the same every month for a time period agreed between you and your lender (usually up to 25 years). Fixed-rate mortgages often have early repayment charges so you need to be sure this is suitable for you for the foreseeable future. Furthermore, the lender may also charge a ‘booking/arrangement fee’ to apply for this type of mortgage.

Tracker

A tracker mortgage will track any movement in the Bank of England Base rate, so you will benefit from any falls in interest rates, but will also have to pay more each month should the rates increase.

Standard Variable Rate (SVR)

The SVR is the lender's standard rate, usually 1-3% above the Bank of England base rate. With a variable rate mortgage, you are normally able to switch lenders at any time without being penalised. If you start a mortgage with a different type of interest repayment for an agreed term, once the term finishes you will go back to the Lenders SVR.

Discount

The discount mortgage rate is another variation of the standard variable rate. It provides a discount from the lenders SVR for a fixed period of time. The interest rate still fluctuates, meaning your monthly repayments may differ slightly from month to month, but the discount remains constant.

You should ask your adviser to explain these in more detail or ask for an illustration.

As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.