There are the two main ways you can pay off your mortgage. These are called ‘repayment’ or ‘interest only’.
With a repayment mortgage you make monthly repayments for an agreed period (the term) until you’ve paid back the loan and the interest.
Interest only mortgage
With an interest only mortgage you make monthly repayments for an agreed period but this will only cover the interest on your loan. You’ll normally also have to pay into another savings or investment plan that will hopefully pay off the loan at the end of the term.
Interest Rate Deals
Capped or Cap
Capped mortgages are the only rate type, other than fixed rates, that will give you payment security. It guarantees your interest rate won’t go beyond an upper fixed interest rate – a limit set by the lender.
The term of a capped mortgage is usually for only an introductory period of two to five years, after which the mortgage will almost always go onto the lender’s standard variable rate or tracker rate for the remaining mortgage term.
Your monthly repayments can’t fall below a certain level which is set by the lender. Collar rates are often put on tracker mortgages.
With a discount mortgage, you’ll get a discount on the lender’s standard variable rate (SVR) for a set period of time, typically two or three years. When your discount mortgage deal comes to an end, your lender will typically transfer you automatically onto its SVR.
With a fixed-rate mortgage, the interest rate stays the same for a set period of time. This means that for every month during this set period, your mortgage repayments will remain the same. At the end of the deal, the interest rate usually reverts to the lender’s standard variable rate (SVR).
LIBOR (London Inter Bank Offer Rate) deals are not widely available but some lenders do offer them. They track the LIBOR rate for a set period of time and will move up or down with it.
This links your savings to your mortgage debt. Instead of earning interest on your savings, that money is balanced against your mortgage so you pay less interest on it. Offset mortgages are typically suited to people who also have large, stable amounts of savings. For example, if you have a £100,000 mortgage and £20,000 in savings, you would only be charged interest on £80,000 of the mortgage. This can save you a significant amount in interest and clear your debt more quickly.
Standard variable rate
With a variable rate mortgage your payments go up or down with the lender’s standard interest rate. This often changes following Bank of England base rate changes.
Stepped rate deals are available on all of the other types and usually start low in the first year and will increase each year until the end of the deal, usually there are penalties to exit these deals early
With a tracker mortgage, it moves directly in line with another interest rate – normally the Bank of England’s base rate plus a few percent. Usually they have a short life, typically two to five years, though some lenders offer trackers which last for the life of your mortgage or until you switch to another deal. If your tracker mortgage rate is low, you can take the opportunity to overpay on your mortgage, shortening the total length of time it will take you to pay off your mortgage, and cutting the amount of interest you pay.
With a variable rate mortgage, your monthly payments can go up or down, according to movements in interest rates at any time. You will need to ensure you have some savings set aside so that you can afford an increase in your payments if rates do rise.
For a continued list of mortgage terminology please read our jargon busting glossary of mortgage terms.