We talk about mortgages a lot here, but while many things are similar, mortgages aren’t a one-size-fits-all thing. There are all sorts of different mortgages out there, and which one you need will depend on your unique circumstances. While we can’t know which mortgage type would be most appropriate for you without talking to your first, we can give you a rundown of the types of mortgages available, and what circumstances you might need them in. Since there are so many different types to go through, we’re going to split this post into 2 parts, one covering repayment mortgages and another (this part) covering interest-only mortgages.
What Is An Interest-Only Mortgage?
This type of mortgage uses your monthly repayment to pay the interest accrued on your mortgage balance but doesn’t make any payments towards the capital that you’ve borrowed. Instead, that loan amount is due at the end of the mortgage term all in one go. This means your monthly payments will be lower, but you will be faced with a large payment at the end of your term, which you may need to remortgage to cover. There are generally two types of interest-only mortgage – fixed rate and variable rate.
Fixed-Rate Mortgages
A fixed-rate mortgage means your interest rate is pre-agreed and fixed for a set amount of time. It won’t be affected by any changes in the Bank of England base rate, so you always know what you’re paying. This fixed-rate is often called an ‘introductory’ term, and is offered for a set period of time before your mortgage reverts to a variable-rate mortgage. The introductory rate typically lasts for two, three or five years of the term, and can be particularly helpful if interest rates are in a state of flux.
Variable-Rate Mortgages
A variable-rate mortgage is essentially the opposite of a fixed-rate mortgage. Instead of a fixed amount of interest, your monthly interest payments will change, normally in line with the Bank of England base rate. So each month the amount you pay is subject to change. There are multiple types of variable rate mortgage you can get:
Standard Variable Rate: You have an interest rate that is set by the lender, and they can increase or decrease that rate based on the Bank of England base rate and other factors.
Tracker: A deal where the interest rate is equivalent to the Bank of England base rate, plus a few percentage points that are set by your lender. So if the base rate is 3%, you might pay that plus 1%, leaving your interest payments at 4%. When the base rate rises of falls, your payments will ‘track’ with it.
Discount: This mortgage type sees you paying a reduced version of your lender’s standard variable rate. The amount of discount is fixed, even if the standard variable rate changes. So, if you have a 1.5% discount, you will pay 1.5% less than the lender’s standard variable rate at any given time. They’re generally only available as introductory offers, and they can be capped now.
Capped: This type of mortgage will never rise above a certain rate – known as the ‘cap’ – which is set by the lender. A cap is most often applied to standard variable rate and tracker mortgages, but it can be applied to other types too depending on the lender.
That’s all for part 1. Come back next month for the next instalment, when we cover repayment mortgages and the various forms they can come in. In the meantime, if you have any questions about interest-only mortgages, or you want to know more about how a mortgage broker can help you find the most appropriate mortgage deal for you, just get in touch with the team today to book your consultation.
GP Norgate Financial Solutions are a trading style of Easy Street Financial Services Limited who are responsible for the advice.
Your home may be repossessed if you do not keep up repayments on your mortgage.