With a repayment mortgage, your monthly payments to the lender go towards reducing the amount you owe as well as paying the interest they charge. This means that each month you are paying off a small part of your mortgage and you have the certainty that your mortgage will be repaid at the end of the term.
Interest Only Mortgages
These mortgages are now only offered with very strict criteria and are not available to everyone. With an interest only mortgage you only pay the interest charged on the loan, so you are not actually reducing the loan itself. You will need to have a feasible repayment strategy in place to repay your loan at the end of the term, for example investments and/or savings plans. Lenders will want to see proof of these.
Standard Variable Rate (SVR)
This is a standard interest rate that can go up or down in line with the market rates, such as the Bank of England's base rate.
Some mortgages start with an initial interest rate set lower than the SVR for a set period of time. At the end of this period, the lender will change the interest rate to the SVR. It's a good idea to talk to your adviser at this stage because the lender's SVR may not be the best deal available.
If you choose a fixed rate mortgage, your monthly payment will stay the same for a set period, usually two, three or five years. At the end of your fixed rate, your lender will usually change your interest rate to their SVR. It's a good idea to talk to your adviser at this stage because the lender's SVR may not be the best deal available.
With a tracker mortgage, the interest rate charged by the lender is linked to a rate such as the Bank of England base rate. This means your payments may go up or down.
An offset mortgage is generally linked to a main current account and/or savings account which are all held with the same lender. Each month, the amount you owe is reduced by the amount in these accounts before working out the interest due on the loan. This means as your current account and saving balances go up, you pay less mortgage interest. As they go down, you pay more. Linked accounts used to reduce mortgage interest payments do not attract interest.
Capped Rate or Capped and Collared Rate
With this type of mortgage, the interest rate in linked to a lender's SVR but with a guarantee that it won't go above a set level (called a 'cap') or below a certain level (called a 'collar') for a set period of time. It's possible to have a capped rate without a collar.
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