Repaying your mortgage
There are basically two alternatives: Repayment (or capital and interest); and Interest-only.
With a repayment mortgage, you pay part interest and part capital repayment to the lender each month and in this way the capital debt outstanding is reduced until the loan is repaid at the end of the term, providing all your repayments are made in full and on time.
With an interest-only mortgage, you make no capital repayments to the lender until the end of the term. Instead payments may be made into an investment designed to repay the loan at the end of the mortgage term. With this type of mortgage there is a risk that the value of the investment may not be enough to repay the debt. During the mortgage term, you pay only interest to the lender on the outstanding balance. Please note that Reeds Rains Ltd does not provide investment advice, and should you require such advice, we recommend that you contact an Independent Financial Adviser. Neither Reeds Rains nor First Complete Ltd are responsible for any advice you receive from a third party.
Some lenders are able to offer a combination of repayment and interest-only, which may be more suited to your individual circumstances.
In addition to the standard variable interest rate, there are many different schemes available: fixed, discount, tracker, capped and collar, flexible, current account and cashback.
With this type of mortgage your payments will go up or down when the lender's mortgage rate changes. Most standard variable rates tend to move in line with the Bank of England base rate, but there is sometimes a delay and there is no guarantee that the lender will pass on the full effect of the increase or decrease. When the interest rate goes up, the amount you have pay also rises, and it falls when interest rates comes down.
This is a variable rate where the interest rate is a set amount above, below or equal to the Bank of England or some other base rate and so always "tracks" changes in that rate. If you're on an introductory tracker rate, your mortgage will usually go onto a standard variable rate or another tracker rate at the end of the initial term.
The mortgage interest rate is fixed for a specified number of years, so you know what your interest payments will be over that period. Following this period, the rate will usually revert to the lender's standard variable rate.
A discounted rate gives you a set 'discount' off the lender's standard variable rate (SVR) for a specified period. For instance if the discount was 1%, you will be charged 1% below the SVR for the period of the discount. When your discount mortgage deal comes to an end, your lender will typically transfer you automatically onto their standard variable rate.
These give various benefits which usually include the ability to vary monthly payments in line with your changing circumstances. They may also allow you to take "payment holidays" and to borrow back any overpayment you have made. Because of their flexible nature and the variety of schemes available it is not possible to give a full description here, but your mortgage adviser will provide more detail if you are interested in this type of loan.
This is a flexible mortgage linked to your current account. With this type of mortgage, you are only charged interest on the net amount you owe the lender, after offsetting any savings or current account balances against the amount of your mortgage.
Some loans offer a lump sum which is paid out following completion, with a mortgage charged at the lender's standard variable rate. Smaller cashbacks may be offered with reduced rates and other incentives as a combination package. When the initial mortgage deal comes to an end, your mortgage will usually go onto the lender's standard variable rate.
Please note that some mortgage schemes may have arrangement fees when they are set up, and have penalties if they are redeemed, either partially or fully, within a specified period of time. Your fully qualified Reeds Rains Mortgage and Protection Adviser can guide you through this.
Buy to let mortgages
A buy to let mortgage enables you to buy a property with the sole purpose of renting it out. A deposit of at least 20% of the property's value may be required. More information about buy to let mortgages.
What is APR?
All lenders have to quote an Annual Percentage Rate (APR) in addition to their standard interest rate. This is to help you compare different schemes. The way APR is calculated can be confusing, but it takes into account other costs, such as any booking fee, arrangement fee as well as the term of the loan, etc. It is designed to provide a more effective indication of which mortgage is likely to be cheaper over the whole mortgage term.