a guide to

Mortgages Explained

Understanding mortgages and how they work is an essential part of being a homeowner. Read our guide to find out more about the types of repayment and what kind of mortgage products you may want to consider when applying for a mortgage.

When you’re choosing a mortgage, deciding which type of deal to go for is a key decision, so it’s really important to understand how they work. After taking out your mortgage, you’ll pay an initial interest rate for a set period of time. This rate can be fixed (guaranteed not to change) or variable (may increase or decrease).

TYPES OF MORTGAGE REPAYMENT

With most mortgages available today, there are broadly two types of repayment options for the borrower:

REPAYMENT MORTGAGES

A repayment mortgage means that the borrower makes monthly repayments to the lender. The repayments are a combination of the capital and interest. Over time, as more capital is repaid, the interest element decreases. Once all repayments have been made, the borrower will own the property outright.

INTEREST-ONLY MORTGAGES

Interest-only mortgages do not include any repayment towards the original loan amount. For the duration of the mortgage term, the borrower will only pay interest. However, at the end of the mortgage term, the borrower will be responsible to pay the original loan amount.

MORTGAGE INTEREST OPTIONS

Once a borrower has chosen a mortgage repayment model, they will then need to choose a mortgage product. There are several options available to borrowers to ensure their needs are met.

STANDARD VARIABLE RATE

These payments can move up or down depending on changes to the rate of interest being charged by the lender. Though there may be changes in the Bank of England’s Base Rate, individual lenders will decide how they set interest rates for their products and charge borrowers.

TRACKER RATE

This is a variable-rate loan with an interest rate that tracks movements in the Base Rate set by the Bank of England. The lender will set the initial rate to be equal to, above or below the Base Rate. Throughout your mortgage term, the chargeable rate will then fluctuate in line with the Base Rate.

FIXED RATE

The borrower is subject to a fixed interest rate for a specified period. This is usually between one and five years, although it can be longer. The main advantage of this is that monthly repayments are ‘fixed’ for the duration of that period, helping the homeowner budget effectively.

DISCOUNTED RATE

A discounted rate is a discount on a lender’s standard variable rate. At the end of the deal, you will move to the standard variable rate. This type of interest option can be good for those who my have a smaller budget in the short term and are confident that they will be able to increase their payments when the deal ends.

VARIABLE RATE CAPS

These are variable rates but with limits. For example, the lender may not be able to increase their rate above a certain amount (cap) or reduce it below a certain floor (collar).

MORTGAGES EXPLAINED

Buying a home and having a mortgage is a big financial responsibility. Understanding how your mortgage and the options you have available to you is an important part of being a homeowner.