How does a repayment Mortgage work?

Monthly payments are made up of interest charged on the amount borrowed and a portion of the capital to repay the mortgage. During the early years, most of each month's payment is interest and it is only later on that you start to repay any significant element of capital.

How does an Interest only Mortgage work?

Monthly payments to the lender consist of interest only and the outstanding loan remains the same. You make payments to a separate investment with the aim of producing enough capital to repay the mortgage in full at the end of the term. There are a number of different investments that can be used. You can also use a combination of them.

What types of Interest rate schemes are there?

Variable rate

The monthly payment goes up and down in line with the lender's mortgage rate. This can cause budgeting problems in times of increasing interest rates. Some lenders offer an annual review so that the amount you pay only changes once a year with the difference adjusting your outstanding mortgage.

Fixed rate

The monthly payment is fixed over an agreed period of time and will remain the same regardless of whether interest rates rise or fall. At the end of the fixed rate term the interest rate usually reverts to the lender's standard variable rate or you may be offered the choice of another product, at the terms available then.

 

Capped rate

The interest rate is guaranteed not to go above a certain level throughout the capped rate period, which can be from 1 to 10 years, but you will benefit from any reduction in interest rates.

 

Discounted

The lender offers a true initial discount, for example a reduction of 0.5% on their normal standard variable rate for a given period. At the end of the discount period, the rate reverts to the lender's standard variable rate. No interest is deferred so the outstanding mortgage will not increase.

 

Cashback

Some lenders offer a cash payment on completion of the loan, either based on a percentage of the total loan or a flat fee.

 

Lenders that offer any type of fixed rate, discount or cashback facilities will want to try and ensure that borrowers are not continually changing lenders in order to take advantage of the latest new offer. They will usually make a redemption charge if you want to redeem your mortgage early. Redemption penalties will be charged if you die within the redemption period so you should consider building this in to the level of life cover you have. You should also make sure that you can afford the standard variable rate that will be charged at the end of the discounted or fixed rate period.

 

For more information regarding "Mortgage Set-up Costs" click here

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