What’s the difference between a repayment, interest-only, fixed and variable mortgage? We explain here.
Over the term of your mortgage, every month, you steadily pay back the money you’ve borrowed, along with interest on however much capital you have left. At the end of the mortgage term, you’ll have paid off the entire loan. The amount of money you have left to pay is also called ‘the capital’, which is why repayment mortgages are also called capital and interest mortgages.
Over the term of your loan, you don’t actually pay off any of the mortgage – just the interest on it. Your monthly payments will be lower, but won’t make a dent in the loan itself. At the end of your term, you have to pay the total amount in full. Usually, people with an interest only mortgage will invest their mortgage, which they’ll then use to pay the mortgage off at the end of the term.
Fixed rate mortgage
The interest rate is fixed for this mortgage. So, you’ll pay the same amount for a set period – e.g. two or five years. This means you’ll know exactly how much your payments will be, so you can plan a monthly budget to help keep your spending on track.
Standard variable rate (SVR) mortgage
This is the normal interest rate your mortgage lender charges homebuyers and it will last as long as your mortgage or until you take out another mortgage deal. Changes in the interest rate might occur after a rise or fall in the base rate set by the Bank of England.
Discounted rate mortgage
This is a discount off the lender’s standard variable rate (SVR) and only applies for a certain length of time, typically two or three years. But it pays to shop around. SVRs differ across lenders, so don’t assume that the bigger the discount, the lower the interest rate.
With a tracker mortgage, your interest rate ‘tracks’ the Bank of England base rate (currently 0.75%) – for example, you might pay the base rate plus 3% (3.75%). In the current mortgage market, you’d typically take out a tracker mortgage with an introductory deal period (for example, two years). After this, you are moved on to your lender’s standard variable rate. However, there are a small number of ‘lifetime’ trackers where your mortgage rate will track the Bank of England base rate for the entire mortgage term.
Capped rate mortgage
Like other variable rate mortgages, capped rates can go up or down over time, but there is a limit above which your interest rate cannot rise, known as the cap. This can provide reassurance that your repayments will never exceed a certain level, but you can still benefit when rates go down. The additional security of this type of deal means that interest rates tend to be slightly higher than the best discounted or tracker rates. There will also usually be an Early Repayment Charge (ERC) if you pay off the mortgage in full and remortgage to another deal.
Some mortgage deals give you cash back when you take them out. But while the costs of moving can make a wad of cash sound extremely appealing, these deals aren’t always the cheapest once you’ve factored in fees and interest. Make sure you take the total cost into account before choosing a deal.
Flexible mortgages let you over and underpay, take payment holidays and make lump-sum withdrawals. This means you could pay your mortgage off early and save on interest. You don’t normally have to have a special mortgage to overpay, though; many ‘normal’ deals will also allow you to pay off extra, up to a certain amount – typically up to 10% each year. Other types of flexible mortgages include offset mortgages, where your savings are used to offset the amount of your mortgage you pay interest on each month. Flexible deals can be more expensive than conventional ones, so make sure you will actually use their features before taking one out.
An offset mortgage allows you to link your savings and current account to your mortgage. You’ll only pay interest on the difference between your mortgage and the balance of your savings account. Plus, you’ll still have full access to your savings.