Mortgages Explained

There are acres of words written about mortgages, but who’s got time (or the inclination) to read all that? Well, as professional mortgage providers, we have! But we know that you are busy, and that mortgages are a rather dull necessity, so we’ve condensed all our reading in to the following useful information.

As we are sure you know, there are two ways to repay your mortgage – capital repayment or interest – only.

With a capital repayment mortgage you pay off both the interest and the capital loan over the life of the mortgage. In the early years you pay off more interest than capital but later on you make bigger bites into the debt so your mortgage balance reduces quickly. As long as you keep up repayments, your mortgage will be repaid.

An interest-only mortgage pays only the interest to the lender and the borrower has other plans for paying off the capital. It is very important that these plans are realistic.

Most lenders now offer mortgages on a so-called ‘part and part’ basis, so you can have some of your mortgage on a repayment basis and some on an interest-only basis. This is particularly useful for borrowers anticipating a shortfall on the value of their endowment policy when it matures.

However you choose to repay your mortgage, you should also consider taking appropriate insurance to protect you and your family if you become sick and are unable to work.

This is the base mortgage interest rate of each lender. Most of them move their standard variable rate (SVR) within a month of a change in Bank of England base rate. However, they sometimes take longer and often do not move by the same amount.

Every 0.25 % movement in interest rates will alter repayments on a £50,000 mortgage by about £10 a month.

Pros: The mortgage is very flexible and there are often no early redemption penalties for moving to another mortgage.

Cons: Mortgage lenders can be quite slow in cutting their SVRs when base rates are cut. Planning your mortgage budget can be tricky because monthly payments can fluctuate.

We think that everyone should spend as little time as possible paying the SVR – there are always better deals around. Why not let us help you find one?

With fixed rate mortgages, payments are fixed at a set interest rate for a given period, often between one and five years, although there are few which are fixed for 10 years or even longer. After that period the mortgage may revert back to the lender’s standard variable rate (SVR).

Pros: You can budget for a set period, giving protection against rising interest rates.

Cons: You will not benefit from interest rate falls should they happen. Also, you may face lock-in penalties if you want to move out of the mortgage.

Important: Steer clear of deals where the penalties run beyond the fixed period.

Offset mortgages are a great way to reduce your mortgage term or monthly payment using a linked savings account to your mortgage

If you have £100,000 mortgage balance and £10,000 in the linked savings account, you only pay interest on £90,000 mortgage, you will not get interest paid on the £10,000 though as this is offset on the mortgage balance

With discount mortgages, you pay interest at the lender’s Standard Variable Rate but with a discount for a given period. Lenders usually offer discounted rates for the first few years of the loan and then switch back to their SVR.

Discounts offered are usually between 1% and 3% and are sometimes tiered. The crucial point is the lender’s Standard Variable Rate. A 1% discount off a low SVR can be worth more than a 1.5% discount off a higher one.

Pros: You will get a guaranteed saving in the early part of the mortgage, when it’s needed most. If interest rates are expected to fall, a discount mortgage may be a good bet as your monthly payments should drop when rates do.

Cons: You will not be protected from an interest rate rise so you will be unable to budget ahead accurately.

As the name suggest, with this type of mortgage you pay interest at the lender’s Standard Variable Rate and will be given a lump sum to spend how you wish. The lump sum may be as high as 5% of the value of your loan, although some may only offer a couple of hundred pounds.

Pros: The cashback could come in handy, providing a lump sum to assist you with your purchases when you move.

Cons: You may be forced to repay the whole amount if you want to pay your mortgage off or switch lender within the first few years. The bigger cashback deals generally have higher redemption penalties should you wish to move to another mortgage provider. The rate of interest you will be paying is typically higher than the best discounted deals.

This mortgage follows the Bank of England base rate with a fixed margin above or below. The margin (e.g. 1% over base rate) will apply for a fixed period such as 2 years, and will be followed by a higher rate (e.g. 3% over base rate) or by the lender’s SVR base rate

Pros: If interest rates fall the tracker will automatically fall within a pre-agreed period, unlike a SVR mortgage which may delay any interest rate cut.

Cons: You are just as easily exposed to interest rate rises so it’s hard to predict your mortgage payments

These are designed to be adaptable and give you greater control over your finances. Over-payments can be made without any penalties so you can pay off your mortgage early if you can afford it.

These over-payments may be borrowed back at a later date and payment holidays may be taken. Many flexible mortgages now offer an ‘offset’ facility where any savings are deducted from the loan amount before calculating the interest payment due. Many may also be linked to a current account.

Pros: Flexible mortgages calculate interest on a daily basis so any extra payments you make immediately cut the interest you are charged. All balances in any linked offset accounts (savings or current) will automatically reduce the amount of interest you pay on your mortgage.

Cons: Interest rates on these mortgages tend not to be the most competitive on the market. You may be paying for flexible features which you may not ever need to use. Offsets are usually most suited to people with savings in cash or with income consisting of irregular large lump sums.