Mortgage Rate & Payment Guide

Fixed Rate Mortgage

A fixed rate mortgage will guarantee the interest rate chargeable for an agreed period. The interest rate is set at the beginning of the mortgage and will not be affected by any subsequent changes in interest rates. Under a fixed rate mortgage the interest rate is set for a specified period typically between 2 and 5 years. Once the agreed period ends, the mortgage interest rate will revert to the lender's normal standard variable rate at that time. Some lenders may offer a further fixed rate for another agreed period. 

Standard Variable Rate Mortgage

This type of mortgage sets its interest rates in accordance with the lenders standard variable rate. If the rate increases or decreases during the lifetime of the mortgage your monthly payments will alter accordingly. 

Discounted Mortgage

A discounted mortgage will provide you with a guarantee that the interest rate charged to your mortgage will remain at an agreed percentage below the lenders normal standard variable rate, i.e. a discount, for an agreed period usually 1 to 5 years. This will mean that your monthly mortgage payments will vary during this period, but the interest rate you will be charged will always be discounted by the percentage agreed initially. Once the agreed period ends your mortgage will revert to the lender's normal standard variable rate at that time. 

Base Rate Tracker Mortgage

Unlike an ordinary standard variable rate mortgage the Tracker tracks or follows the Base Rate set by Bank of England. This means all Bank rate cuts or increases are automatically passed on to the borrower. The difference between the Base and Pay rate remains constant for an agreed period and is normally far smaller than the mortgage on an ordinary variable rate 

Capped Mortgage

A capped rate mortgage is set at a rate of interest, above which the rate cannot rise during an agreed period, usually 1 to 5 years. However, should the lenders normal standard variable rate fall below the rate that has been set, then the rate of interest being charged will also reduce accordingly. Once reduced, this rate could increase if the lender's normal standard variable rate increases but will not increase above the rate initially set, i.e. the "cap". 

Capped & Collared Mortgage

This type of mortgage is similar to the capped rate mortgage, except that there will be a minimum rate of interest set, i.e. "collar", below which the rate of interest will not fall. 

Deferred Rate Mortgage

This arrangement requires only a portion of the interest charged on a mortgage to be paid for an agreed period, and the unpaid portion will be added to the mortgage balance. This means that for the agreed period you will pay a lower monthly payment, but the remainder will be added to your balance thereby increasing the amount you owe at the end of the agreed period, the full monthly payment will be required on the new mortgage balance, that is the original amount plus the "deferred" amount of interest. The monthly payment you make after the initial period of "deferred" interest will be higher than that on a conventional mortgage arrangement, although the interest rate will be the same. 

Cash Back Mortgage

This may be a fixed rate mortgage or a normal standard variable rate mortgage but with an incentive payment, often expressed as a percentage of the amount borrowed, made from the lender to the borrower following completion of the mortgage arrangements. Such payments are usually made in the form of a lump sum, but can be spread over 1 or 2 years. The payments called "cashbacks" are treated as gifts and are normally subject to capital gains tax. 

Flexible Mortgage

This is a method that allows you the flexibility of decreasing either the term or the quantum of your mortgage, by making overpayments to your lender at any time, without penalty. This may also allow you to borrow additional amounts from your chosen lender secured against the property, within certain confines, for a maximum amount usually agreed at the outset, this of course will increase your monthly payments or the term of the loan agreed at the outset.

LIBOR Linked Mortgage

LIBOR is the London Inter Bank Offered Rate and is the rate at which banks lend money to each other. LIBOR changes daily and a LIBOR linked mortgage will normally be adjusted every three months. LIBOR linked rates are usually quoted as X% above LIBOR.

Repayment Type Guide:

Having selected the type of mortgage that you require you then have to choose how to repay your mortgage. It is important that you understand that whichever mortgage you choose, you will have to repay the capital ( the amount that you borrowed) together with interest calculated on the loan. There are two types of mortgage payment method.

1. Interest Only Mortgage

The Interest only Mortgage is arranged so that the capital sum you borrow remains outstanding until the end of the mortgage term and you only pay interest on your loan until that time. At the end of the mortgage term you will then be required to repay the original loan. Your lender will usually insist that you save towards the repayment of the loan using some form of investment plan. 

There are many different types of investment mechanisms which you may use to repay the balance of your interest only loan. Below is a brief summary of the main repayment vehicles available. 

Endowment:

This type of plan is generally selected in conjunction with your mortgage and must therefore expire at the same time. Your regular premiums will be used to purchase units in a chosen fund. Over the term of the mortgage the more you save the more the number of your units increase. The value of each of those units increases to reflect the growth in the value of the underlying investment. However it is important to understand that the value of units can do down as well as up. The endowment policy also provides you with life cover so that should you die during the mortgage term there is a guaranteed sum available to repay your loan. This life cover is paid for by cancelling units which have been allocated to your plan. At the end of the mortgage term a maturity value will be available for the purpose of repaying the outstanding capital. The maturity value will be based upon the number of units that you have purchased and the value of those units. There is no guarantee that the value of your plan will be sufficient to repay your outstanding loan although reviews will be conducted to monitor this.

Your endowment policy may also include critical illness cover which will pay a lump sum on diagnosis of a certain illness as defined within the policy conditions. 

Pension:

A pension mortgage is arranged so that the mortgage expires at your normal retirement date. The tax free lump sum from your pension fund is used to repay your outstanding loan. Your pension contributions will be used to purchase units in your chosen fund. The value of the funds may go up and down. At retirement your fund will be assessed to determine its final value. Your tax free cash sum will be calculated based on this final figure and this may then be used to repay your outstanding loan. There is no guarantee that the tax free cash sum will be sufficient to repay your loan. 

If you select a pension mortgage then you may need a term assurance policy to protect your home and repay the outstanding loan should you die before retirement. 

ISA (Individual Savings Account):

An ISA is a tax efficient form of savings which allows you to invest your money either by means of single contributions or monthly contributions into one or both of two areas, a cash based deposit account or in equities. You will be able to choose from a variety of funds in which you can invest your money and at the end of the mortgage term the accumulated fund value will be used to repay your outstanding mortgage. 

Whilst the return from equity based ISA's cannot be guaranteed and the return may be more or less than the amount you have borrowed, cash based ISA's are unlikely to achieve a sufficiently attractive return to build up a sufficiently large fund to repay your mortgage. 

If you select an ISA mortgage then you may need a term assurance policy to protect your home and repay the outstanding loan should you die before the end of the mortgage term.

If you select a interest only mortgage it is your responsibility to ensure that a suitable investment product is in place to repay the mortgage loan otherwise your home is at risk.

2. Capital and Interest (Repayment Mortgage)

The mortgage payments on a repayment mortgage are divided into two elements. The first is repaying of the original capital borrowed and the second is the interest charged on the loan. In the early years more interest than capital is repaid but as time goes on this will change so that more of your monthly mortgage payment is used to repay the outstanding capital. At the end of the repayment period you will have guaranteed to have repaid the amount you borrowed providing that you have maintained your mortgage payments.

Mortgages Made Easy is a trading name of 1st Contact UK which is an independent marketing website and not a lender or broker and are not authorized or regulated by the Financial services Authority. We do not sell or recommend mortgages or broker services. We pass on enquiries to financial service providers and cannot offer advice. 1st Contact UK is not responsible or liable for any financial service or mortgage obtained through a 3rd party. The enquiry from this website does not constitute an offer to provide a mortgage.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.