Mortgages Explained

1. Understanding how mortgages work

A mortgage is a long-term loan used to buy property or land. You’ll borrow money from a lender and repay it over an agreed term (typically 25 to 35 years), plus interest.

When you take out a mortgage, you’ll usually pay an initial interest rate for a set period – either fixed (stays the same) or variable (can go up or down). After this initial period ends, your mortgage typically reverts to the lender’s Standard Variable Rate (SVR) unless you remortgage or switch to a new deal.

Understanding the different repayment and rate options available is key to finding the right product for your financial goals.

2. Types of mortgage repayment

There are two main ways to repay your mortgage:

Repayment mortgages: With a repayment mortgage, your monthly payments include both the loan (capital) and the interest. Over time, you’ll gradually pay down the loan balance – and once the term ends, you’ll fully own your home. This option provides security and long-term ownership, making it the most common mortgage type in the UK.

Interest-only mortgages: With an interest-only mortgage, your monthly payments only cover the interest – not the capital borrowed. At the end of the term, you’ll need to repay the original loan in full, often using savings, investments, or the sale of another property. This type of mortgage is more common among landlords or higher-net-worth individuals with a clear repayment plan.

3. Mortgage interest rate options

After choosing a repayment method, you’ll also need to decide how your mortgage interest rate is structured. The main options include:

Fixed-Rate Mortgages

You pay a fixed interest rate for a set period – usually between 2 and 5 years, sometimes longer. Your monthly payments stay the same throughout, offering stability and easier budgeting. However, fixed-rate deals can come with early repayment charges if you switch before the term ends.

Tracker Mortgages

A tracker mortgage follows the Bank of England’s Base Rate, plus a set percentage added by your lender. For example, if the Base Rate rises, your monthly payment increases too. When rates fall, your payments decrease. This type of mortgage can offer good value when rates are low, but it also carries more uncertainty.

Standard Variable Rate (SVR)

Once your initial deal ends, your mortgage usually moves to your lender’s SVR – a rate they set independently of the Bank of England. SVRs can change at any time, often resulting in higher monthly payments. Many homeowners remortgage before reaching this stage to avoid paying more.

Discounted Variable Rate

This offers a temporary discount on the lender’s SVR, often for 2–3 years. Your payments will still vary, but at a reduced rate during the discount period. It can be a good option for buyers wanting lower payments initially, as long as they’re prepared for potential increases later.

Capped or Collared Variable Rates

Some lenders offer variable rates with limits – known as caps (maximum increase) or collars (minimum rate). These add a level of protection by restricting how much your rate can rise or fall over the deal period.

4. How mortgage deals are structured

Most mortgage products come with an initial term (e.g. 2, 3, or 5 years). Once this ends, the mortgage typically switches to the lender’s SVR. At this point, it’s often worth reviewing your mortgage with an adviser to see if you can remortgage to a better rate and save money.

Many mortgages also include:

• Arrangement or product fees
• Valuation fees
• Early repayment charges if you leave before the deal ends

Your adviser will factor these into the total cost comparison to find the best overall value.

5. Things to consider when choosing a mortgage

When selecting your mortgage type and deal, think about:

• How long you plan to stay in the property
• Whether you prefer fixed monthly payments or flexibility
• Your appetite for risk if interest rates rise
• The total cost of the mortgage (including fees)
• Future changes to your income or expenses

A good mortgage adviser will help you balance these factors and identify the most suitable product for your circumstances.