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About mortgages - A brief overview

Here we have tried to provide a brief explanation for some of the most common mortgage terms and features. If you still have questions after reading this page then please contact us and we will be pleased to help.

Capital repayment - Interest only - The Rest period - Standard Variable rate
Tracker rate - Discounted variable - Fixed - Capped - Cashback - Re-mortgage
Flexible mortgages - Redemption penalties - Penalty period - Fees free - Lifetime mortgages

Capital Repayment mortgage

This could be called either a repayment or capital and interest loan. This mortgage is designed to fully repay the initial sum over the term of the loan. The lender calculates the monthly payment required which will be part capital and part interest. In the early years the majority of your payments will be interest and the balance reduces slowly.

Interest Only mortgage

As the name suggests, you only pay the lender the interest due each month on your mortgage. You do not make any capital repayments and the balance of your mortgage will remain constant and does not decrease. It is your responsibility to maintain some vehicle or plan which will repay the debt at the end of the term. This could be an endowment plan, pension or ISA for example. You could actually utilise any method you choose, ensuring that the loan is repaid on time will be your responsibility not the lender’s.

The “Rest” Period

This refers to when the interest on your mortgage loan is calculated. It could be

This is mainly beneficial for repayment loans when the debt is actually decreasing and has no effect for interest only loans. For repayment loans it would be beneficial to have a monthly rest account as the interest owed is recalculated each time you make a payment and reduce your debt. For people with a current account flexible mortgage with an active transaction pattern, daily rest would be more useful.
Yearly rest is an outdated method of calculation but is still widely used amongst lenders. They calculate the interest due at the beginning of each year and effectively ignore capital payments you make until the next review date in 12 months time.

Standard Variable Rate (SVR) mortgage

This is the lender’s “normal” mortgage interest rate. Each lender sets their own SVR, which then may vary according to the Bank of England rate changes. Most discounted rates are based on the SVR.
If you start your mortgage on a fixed or discounted rate then you would normally revert to the SVR once your special terms have expired. Depending on any redemption penalties you may then move your mortgage to a new special deal and lower your payments.

Tracker Rates

Tracker rates are now commonly available on a wide variety of mortgages. Essentially, they track the Bank of England (BoE) base rate. This differs from the SVR above which lenders are at liberty to change to suit their own requirements. The 'tracker rate' can only change when the Bank of England rate changes, for some a much fairer scenario. Tracker rates tend to carry an additional fixed interest rate that the lenders charge. For example BoE plus 1.00%. You would pay the BoE base rate plus 1% that the lender charges on top. Overall, this can be cheaper than opting for the lenders SVR.

Discounted Variable Rate

This is based on the SVR less a fixed discounted percentage. You pay the reduced rate for the period of the special product offer. Most lenders have a good selection of discounted rates over different terms. If rates change your 'discounted' rate will also change; either up or down.

Fixed Rates

This option will fix your interest rate for a set period of time regardless of movements in interest rates during the same period. This provides certainty in knowing the payments will not change, but can be a disadvantage if interest rates subsequently reduce, leaving you at the higher rate. A popular choice for first time buyers to aid budgeting in the early years.

Capped Rates

This is a style of fixed rate but with the advantage that you could benefit from further interest reductions. Capped rates are not widely available. Initially the rate charged is capped at a certain level for a set period of time. This means that if interest rates rise your payment will increase but only as far as the capped level. However, if rates fall below the capped rate, your payments will reduce. Capped rates are generally more expensive than fixed rates over the same period of time.

Cashback

This type of deal will give you back a percentage of your loan as a cash sum. Because you have received such a large benefit initially, the interest rate charged on your mortgage will generally be the SVR or an even higher rate. There will certainly be a redemption period with this type of loan.

Re-mortgages

A re-mortgage simply involves moving or transferring a current mortgage to a new lender. This can also include raising extra capital by increasing the loan size. Most lenders offer attractive terms to secure this business from their competitors and large savings can be made.

Flexible Mortgages and offset mortgages

These are a fairly new type of mortgage but more lenders are adopting it as an option. The rules and features will vary from lender to lender as the account is quite complex.

Generally lenders will allow overpayments, underpayments, payment holidays and the ability to have access to previous overpayments. Some lenders attach current and savings accounts to the loan or even credit cards and personal loans. As the debt is secured on your property, the interest rates charged should normally be lower than on other unsecured options.

Many schemes allow you to use savings accounts to offset against your main mortgage to reduce the interest charged.

Some lenders will grant you an overall mortgage credit facility at outset. You may then choose to spend some of this on virtually any legal purpose you choose. You will be charged interest at the prevailing rate but do not have to “apply” each time you need access to the funds, as this has been agreed at outset.

Redemption Penalties / Early repayment charges

Most schemes, not all, will have some kind of redemption penalty or early repayment charge. This fee is payable when you repay or reduce your mortgage within the penalty period.

It is generally expresses as a percentage of the amount repaid or a certain number of months’ interest. Many lenders will now allow part reductions of 10% to 25% of the initial loan without incurring a penalty. If your scheme is portable, you will be allowed to “port” or transfer your special terms to your new property and thus not incur a penalty. All lenders apply different criteria so you should check beforehand.

Penalty Period

This is the period of time during which redemption penalties will be payable (as above). You should be aware that a penalty period can be longer than the special product period, e.g. a 2 year fixed rate could have a 3 year penalty period.

Fees Free/Switch & Save

These are generally available for customers who are not moving but wish to transfer their mortgage to a new lender on special terms. The new lender will generally pay valuation fees and legal fees up to set limits but it is common now to still charge an arrangement fee. They will not pay any redemption penalties incurred in the transfer. A useful way of transferring your mortgage on to a lower payment rate with reduced initial costs.

Lifetime Mortgages

This is a new term to describe Equity Release mortgages and Home Reversion schemes.