Finding the right mortgage

Types of mortgages

A First Mortgage advisor will take you through all the different mortgage options and decide on which one best suits your unique circumstances. Below explains the differences between repayment and interest-only mortgages, fixed and variable interest rates, and all the different types of mortgages offered by lenders.

Repayment or interest-only mortgage

There are many types of mortgages, but all of them will be repayment or interest-only. These are terms to describe how you are paying off the mortgage – as you go (repayment) or in one lump sum at the end (interest only).

Repayment mortgages – you pay the interest and part of the capital off every month. At the end of the term, typically 25 years, you should manage to have paid it all off and own your home outright.

Interest-only mortgages – you pay only the interest on the loan and nothing off the capital (the amount you borrowed). As you are only paying off the interest, you need to have a plan in place to pay off the rest of the loan at the end of the mortgage term. Interest-only mortgages are seldom offered due to the difficulties involved in making the lump-sum payment, but they are still an option for some to consider.

Fixed or variable rate mortgage

After working out whether to pay off both capital and interest (repayment) or just the interest (which is much rarer these days), you can then look at paying a fixed or variable rate mortgage.

Fixed – with a fixed rate, the interest you’re charged stays the same for several years. The amount you pay will be the same throughout the deal, no matter what happens to interest rates.

These mortgages are often referred to as ‘two-year fixed’ or ‘five-year fixed’, dependent on how long the rate is fixed for. On the plus side, you know exactly where you are with a fixed rate, helping you to budget your monthly spend. On the downside, fixed rates are usually slightly higher than variable ones, and if interest rates fall, you won’t benefit.

Variable – with a variable rate mortgage, the amount you pay is liable to go up or down if the lender changes the interest rate. The advantage of a variable rate is that you can usually overpay or leave at any time, and your interest rate could decrease, meaning you pay less. Or, interest rates could also go up at any time, meaning you end up paying more.

Standard variable rate (SVR) mortgage

SVR is the normal interest rate that mortgage lenders charge homebuyers. It will last as long as your mortgage or until you take out another mortgage deal. Changes in the interest rate may occur after a rise or fall in the base rate set by the Bank of England, but the lender chooses the rate.