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Mortgage Types

Repayment

A repayment mortgage ensures that the monthly repayments paid over the mortgage term will, at the end of the term pay off the original amount borrowed, as well as the interest that will have accrued.

At a glance:

A repayment mortgage is clear cut and uncomplicated
Provided all payments are made it is a sure fire way of repaying the loan
The total amount owed by you decreases over time
You do not have to arrange life cover to repay the mortgage. However, it is worthwhile to at least arrange term assurance to ensure that the loan could be repaid in the event of your death, thus avoiding the need to sell your home in order to repay the mortgage.
As interest rates go up in later years, it will not have as much of an influence on the amount owed due to the fact that the capital will have decreased.

Interest only

As their name suggests Interest Only mortgages only pay the interest due to the lender each month, meaning the original loan amount remains the same for the term of the loan. It is therefore strongly recommended that a suitable investment is planned in order to repay the loan at the end of the term. Arranged at the beginning of the term, the types of investments, also known as a Repayment Vehicle, include Pension mortgages, Endowment mortgages, PEP mortgages and ISA mortgages.

Because the amount originally borrowed does not change during the term of the mortgage (because you only pay off the interest) it is essential that the repayment vehicle chosen should bestow a sufficiently large sum to repay the original amount borrowed at the end of the term.

At a glance:

Investments are NOT guaranteed to appreciate, so there is a risk involved
If the investment does not provide as a good a return as was expected it may not cover the loan. It is therefore up to you to ensure that you can repay the loan at the end of the term.
Investments are PORTABLE. This means that you can keep the investment when you move, adding to them and linking them to a new mortgage.
Because the original amount borrowed does not go down should you sell your house the full amount originally borrowed will need to be repaid.

Flexible

This type of mortgage is relatively new. It enables you to overpay, underpay and even take payment holidays without incurring penalties. Because interest is calculated daily on most flexible mortgages, this brings about the full benefits of overpaying. For example, regularly overpaying the Flexible Mortgage without later underpaying, could lead to the mortgage being paid off much sooner, saving you thousands of pounds in interest.

Flexible mortgages are available as either an interest only mortgage or as a repayment mortgage and are applied to your choice of interest rate, ie. Capped, Discounted or Fixed Rate.

The main benefits of the flexible mortgage are:

You can vary your payments to adjust to your current financial situation and lifestyle.
Has the potential for you to benefit from substantial interest payment savings.
Allows you to repay the loan before the end of the term using regular overpayments if you choose to.
Provides an excellent place to house spare money. This is due to the fact that the interest saved on your loan will normally outweigh the amount you would otherwise normally receive from saving accounts, even prior to income tax, which usually affects savings accounts.

At a glance:

Flexible mortgages permit overpayment and underpayment on mortgages and allows all overpayments to be drawn back.
Provides the opportunity to repay your loan before the end of the term by overpaying.
Daily interest calculations give the benefit of saving you money when overpayments are made, even if the money is drawn back at a later date.
Flexible mortgages allow you to vary the amount you pay. Therefore underpayment, overpayment or taking a payment holiday is permitted as long as your original mortgage threshold is not exceeded.
Generally there are no penalties for redemption of the mortgage.
Some flexible mortgages enable you to use your mortgage account as a current account. This gives you the opportunity to pool your money with the standard current account options of a cheque book and debit card.

Interest Rate Types

Like there are different types of mortgages there are also different types of interest rates that can apply to your mortgage. These are Variable, Discounted, Capped or Fixed.

At a glance:

VARIABLE rates are usually referred to as the standard variable rate. This rate normally fluctuates in line with the Bank of England interest rate.
DICOUNTED rates are the lenders standard variable rate but with a fixed percentage discount applied to it. It is important to note that if you wish to pay back your loan before the end of the discounted rate period, you may have to pay a charge. This charge is called a redemption penalty and can also apply for a short time after the discount rate has ended.
FIXED rates remain static for a set period of time, usually a number of years. This means that during this period of time you are not affected if rates go up or down. At the end of fixed rate period the rate goes back to the lender’s variable rate. It is important to note that whilst it is usually possible to choose your preferred length of fixed rate period, this selection is limited to the current offers available.
CAPPED rates limit your payments to variations between a minimum and a maximum rate for a set period of time. You therefore know, that during the period of time chosen, your interest rate will NOT go above a certain rate, but you will benefit if the standard variable rate falls below this rate, therefore reducing your monthly repayment.

Remember. Mortgages are personal to you - your circumstances, your lifestyle and your budget.

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