Types of
mortgages
How can I pay my mortgage off?
There are two main ways to make monthly repayments towards a mortgage; repayment mortgage and interest only mortgage.
Repayment Mortgage
Also known as a Capital & Interest Mortgage, the monthly payments gradually pay off the original sum loaned as well as the interest charged on the loan over a set period of time (known as ‘the term’). The term of the loan will depend on several variables, but a 25-year term is not uncommon and provided all agreed payments have been met the loan will be paid off by the end of the mortgage term.
Interest Only Mortgage
The monthly payments only pay for the lender’s interest on the loan and do not pay off any of the capital. A lump sum needs to be built up by paying in to a savings or investment plan to pay off the mortgage at the end of the term.
Other mortgage types you might come across include:
Remortgage
This term is used if you change your current mortgage for a new mortgage without moving home. People usually remortgage for one of two reasons; to save money on their monthly repayments or to raise money from equity in their home.
Buy To Let Mortgage
A loan specifically targeted at people who invest in property. There are likely to be several specific restrictions in place, for example the sum loaned is usually dependent on the value of the property, and furthermore the expected rental income must also be at a certain level above your mortgage repayments, usually 125%.
Fixed Rate Mortgage
Where the interest rate, and therefore your monthly repayments, are unchanged for a set time regardless of what the lender’s standard variable rate is. If you expect the interest rate to rise, then a fixed rate mortgage can protect you from rising mortgage payments, but only for the agreed fixed rate period; the standard variable rate will be applied once the fixed rate term has ended, so you must budget for this if necessary.
Capped Mortgage
A capped rate mortgage rises and falls with the lender’s standard variable interest rate, but the interest rate you pay will never go above an agreed level. It’s a way of guaranteeing your maximum monthly repayment for the term of your mortgage.
Base Rate Tracker Mortgage
This type of mortgage has an interest rate that is a fixed percentage above the Bank Of England’s base rate. The rate is variable but is usually below the lender’s standard variable rate.