Repayment
This is a pretty straightforward type of mortgage. You pay an amount each month that covers both capital (the price you paid for the house, less your deposit) and interest (the fee you pay the lender for loaning you the money). The benefit of this type of mortgage is that at the end of the term (typically 25 years) you’ll have paid off your mortgage completely. You’ll own your house outright and won’t owe your lender another penny.
Interest-only
As the name suggests, each month you pay the interest owing, but nothing towards the loan itself e.g. the amount you agreed to pay for the house remains unpaid. The period for the mortgage arrangement can be as short as a few years, or as long as 20+. At the end of the term you’ll need to find the funds to pay for the house (at the price you initially agreed) from a different source, like savings, or remortgage to borrow the funds. Interest rates tend to be higher on these deals than on a repayment mortgage, but your monthly payments will usually be lower.
Fixed
A fixed-rate mortgage means your interest rate is guaranteed to stay the same for a fixed period, usually between 2 and 10 years. This means your monthly repayments are the same each month. At the end of the agreed period you’ll move to your lender’s standard variable rate (SVR) unless you remortgage. You may be able to switch to another deal either with your current lender or switch to a new mortgage provider. Remortgaging can come with additional costs – such as early repayment charges (ERC) – so always check the small print.
Tracker
A tracker mortgage works on a variable rate. It ‘tracks’ a base rate, set by the Bank of England (the interest rate at which high street banks borrow money), which means you pay a different amount when interest rates change. Your repayments may go up or down.
Discounted
A discount mortgage is a type of variable rate deal where the lender offers a discount on their standard variable rate (SVR) for a fixed period: typically 2 to 20+ years. This mortgage tracks a rate set by the lender so may jump around more than a tracker that follows the Bank of England’s base rate. Early repayment charges (ERC) can be costly on these deals.
We hope this gives a taste of the range of mortgages available. For more in depth information and advice to help you choose the right option for you, we recommend contacting Money Helper. As a non-profit organisation they offer impartial, government backed advice on all sorts of money related issues including the financial aspects of buying a home.
