Traditional Mortgages:

A traditional mortgage is a secured loan where the property you are buying is the collateral. Your initial equity in the property is equivalent to the deposit you have put in the beginning and it increases as you pay more towards the principal. To know, how much your monthly payment will be and how much exactly you will be paying towards principal and interest in each payment click here.

In Repayment mortgage you pay interest and a portion of principal in each payment. This allows you to pay back the full loan at end of the term and the property becomes 100% yours. In Interest Only mortgage you only pay interest and the whole principal is outstanding at end of the term. You cannot claim the property until you pay the full principal back. As you can see from the mortgage calculator (see the button below), the total sum payable on Repayment basis (also called as capital and interest basis) is substantially less than Interest Only basis and as a general advice Repayment mortgage is the best option. However Interest Only options allows you to keep your monthly payment low so if your current financial situation requires your payment to be low and you are expecting some windfall in future then you may go for Interest Only (remember that the whole principal becomes immediately payable at end of the term). If your lender is offering “Part Repayment and Part Interest Only” then you may consider that based on your circumstances.

You will notice from the amortization schedule for a repayment mortgage how initial payments almost entirely pay towards interest with little going towards principal. As you make more and more payments the portion of payment towards principal increases and the last payment clears the whole principal (outstanding balance zero)

The interest rate varies as per the product available in the market. I am just describing here a few key types of products based on interest rate;

Fixed rate:

As the name suggests rate is fixed for the whole term. This is very rare in the UK now.

Base rate tracker (BRT):

The rate tracks Bank of England base rate. This can be beneficial in a low interest rate economy. Conversely if the base rate increases your payment goes up

Standard variable rate (SVR):

Most banks offer products with SVR. It is similar to BRT in principle, however unlike BRT there is no obligation on the bank to follow base rate changes (e.g. a bank may not choose to pass on lower rate to customer if base rate goes down, whereas in BRT they must follow base rate). Most banks do vary SVR in line with base rate changes as a standard business practice.

Many mortgage products offer a promotional lower rate (usually fixed) for a few years before switching to SVR to lure new customers.

Offset or Current Account mortgage:

In this type of product your mortgage balance is reduced by the amount you hold in a linked savings or current account, thus reducing your interest bill.

Many banks allow you to overpay, helping you to reduce your balance and allowing you to either lower your monthly payment or finish the term early. You must check with your bank before making the overpayment that they are allowed without any extra charges.

Fees and charges: Most banks charge various fees for mortgage inception and administration such as product fee, valuation fee, early repayment charge, redemption, consent to let etc. You must be aware of all these fees before taking on the mortgage.

Re-mortgage:You can also transfer your home loan to another lender (Re-mortgage) if they are offering you better terms. As usual you need to be careful about any exit fees/charges etc before taking on any re-mortgage offer.

The bank will do the affordability check not just on monthly payment value, but your ability to pay back the whole loan over the term. If you do not keep up with your mortgage payments, then there is a risk of bank repossessing your property.

In the UK the mortgage market is regulated by the FCA (Financial Conduct Authority). Given the complexity and liabilities related to a mortgage application you should do as much research as possible before taking out the loan and only deal with reputed and regulated lenders or brokers.

Disclaimer: The information and advice mentioned here is of general nature only and should not be construed as financial advice. The author is not liable for any loss or damage suffered because of this advice.