Mortgage Advice

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Taking out a mortgage is likely to be the largest financial commitment you make, so you will want the confidence that you get the right product for you at the best possible rate.

Type of Mortgages

All mortgage products fall in to two main categories: fixed rate mortgages and variable rate mortgages.  A fixed rate mortgage is where the interest rate on the loan is fixed for a given period of time, usually 2 – 5 years.  A variable rate mortgage is where the interest rate on the loan varies with the underlying Bank of England base rate (BR).  All other mortgages come under fixed rate, variable or a combination of both.  These include:

  • Fixed rate mortgages – allow you to fix the rate of interest you will pay on your mortgage for an agreed period. The most popular fixed rate mortgages terms are two-year, three-year and five-year deals, but it is possible to get a fixed-rate mortgage for anything from six months to 25 years
  • Discount motgages – offer a percentage off a lender’s standard variable rate (SVR) for a set period of normally two to three years (although the time period can be longer depending on the deal). For example, if a lender’s SVR is 5% and the discount is 1.5%, you will pay a rate of 3.5% on your mortgage. With a stepped discount mortgage, your discount changes at one or more set points during the deal period, so you could have a discount of 2% below the SVR in your first year, and a 1% discount in your second year, for example
  • Offset mortgages – pull all of your finances into a single account so it runs your current account, mortgage, savings and personal loan accounts together. On a daily basis, it adds up all of your assets and your savings, plus the money in your current account, and offsets them against your debts (mortgage and loans)
  • Capped mortgages – very similar to a fixed rate mortgage, in that there is a maximum interest rate set for a given period of time, and the rate you pay is guaranteed not to go above that rate for the agreed period.  However, should the BR fall during that period the rate you pay for your mortgage will ‘track’ the interest rate downwards, reducing your mortgage repayments
  • Flexible mortgages – allow you to make over payments, underpayments, take payment holidays, calculate interest daily and more and often suit people with a fluctuating income e.g. self-employed or commission-only sales people
  • Tracker mortgages – follow the BR or the lender’s Standard variable rate (SVR), plus or minus a certain percentage. For example, if your two-year tracker has a rate of Base Rate (BR) +0.9%, if the Base Rate is 3%, your product rate will be 3.9%.  If the BR drops to 2%, your rate will also fall to 2.9%

To find out the pros and cons of each type of mortgage, please visit the mortgage questions and answers section.

Mortgage Repayment Methods

There are two ways you can pay off mortgage debt: a repayment mortgage or an interest-only mortgage (or sometimes a combination of both).

A repayment mortgage consists of repaying the capital amount borrowed as well as the accrued interest.

The primary advantage of a repayment mortgage is that at the end of the mortgage term, the full amount of the debt has been repaid. It removes the risk of relying on an investment that may not perform well enough to pay off the capital owing at the end of the term. You are therefore less likely to suffer from negative equity because the mortgage balance will be reducing month on month.

Over time, the equity percentage in the property increases. However, in the early years the bulk of the mortgage repayments consist of the interest component, so not much of the capital is actually paid off for some time.

The graph below illustrates the rate at which capital is paid off in a £200,000 repayment mortgage:

 

An interest-only mortgage is a loan in which, for a set term, you pay only the interest on the principal balance, with the principal balance remaining unchanged. At the end of the term (e.g. 25 years) you may enter an interest-only mortgage, pay off the principal, or with some lenders, convert the mortgage to a repayment method.

Find out more about interest-only mortgage repayment methods.

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Your home may be repossessed if you do not keep up repayments on your mortgage.