Mortgage
Mortgage Repayment
Repayment methods
There are the two main ways you can pay off your mortgage. These are called 'repayment' or 'interest only'.
Repayment mortgage
With a repayment mortgage you make monthly repayments for an agreed period (the term) until you've paid back the loan and the interest.
Interest only mortgage
With an interest only mortgage you make monthly repayments for an agreed period but this will only cover the interest on your loan. You'll normally also have to pay into another savings or investment plan that'll hopefully pay off the loan at the end of the term.
As well as deciding on your repayment method, you'll need to look at the interest rate deals on offer.
Standard variable rate
With a variable rate mortgage your payments go up or down with the lender's standard interest rate. This often changes following Bank of England base rate changes.
Standard variable rate with cashback
With these deals you get a cash lump sum as well as the loan when you take out the mortgage. You're usually tied into the variable rate for a set period.
Discounted rate
You pay a lower interest rate to begin with then move to another rate (usually the lender's standard variable rate) after a set period.
Tracker
Tracker rates are linked to the Bank of England rate or some other 'base rate'. This means they'll always go up or down in line with changes to the base rate.
Fixed rate
You pay a fixed rate of interest for a set period, so you know exactly what you'll be paying each month during that time. When the fixed period ends, you'll usually move to the lender's standard variable rate. There are usually penalties if you pull out early.
Capped or cap and collar
With a capped rate you pay a variable interest rate, but there's a ceiling so your payments won't go above a certain amount for a set period. Some deals include a collar too - this is the lowest rate you'll get. If interest rates fall below the collar, you'll lose out.
Which type of interest rate is suitable for you?
Suitability of different deals will depend on your personal circumstances and any tie-ins or penalties that may be attached
Current account and Offset mortgages
Flexible, current account and offset mortgages give you more control to vary your monthly payments. They can be used with repayment or interest only mortgages. For example you can:
pay less one month and more the next
make lump sum repayments (and sometimes draw these back)
take a 'payment holiday'
pay off your mortgage early
The Financial Services Authority (FSA) is the UK's financial watchdog set up by government to regulate financial services. You can use its online mortgage calculators to work out monthly payments based on different interest rates. But bear in mind that they don't account for extra costs, such associated insurance and investment policies.