- Here, the payments you make to your mortgage lender each month consist of both interest and an amount towards reducing the amount of the loan. So each month you are paying off a part of the mortgage. The advantage being this is a very clear and simple approach. You can see your mortgage getting smaller. In the early years most of your payments will go towards funding the interest element.
Interest Only Mortgage
- As the name suggests your monthly payment to your mortgage lender only pays the interest charges on your loan. You are NOT reducing the amount of your loan. It is very important for you to arrange another way to repay the loan at the end of the term. For example, an investment or a savings plan. Your debt is not going to reduce so you need to check on a regular basis that your investments or savings are on track to repay the loan at the end of the term.
- In some instances you can arrange to have a combination of the two options above, whereby part of your loan can be arranged on a repayment basis and part on an interest only
Choosing a repayment or interest only is only part of your decision regarding your mortgage. You also need to decide on the type of interest rate deal to consider. The different types of interest rate deals are explained below:
- With this kind of interest rate deal your payments will move up and down with the lenders own mortgage interest rate which is normally driven by the Bank of England’s base rate.
- A variable rate loan with an interest rate that’s set either above or below the Bank of England or some other base rate mechanism set independently from the lender. Your mortgage payments will track that rate. In other words your payments will move up and down as that rate changes.
- Your payments will be set at a certain level for an agreed period. At the end of that period it will usually move to your lenders standard variable rate.
- Your mortgage payments will go up and down but you will enjoy a discount on the lenders standard variable rate for a set period of time. Sometimes two or three years. At the end of this time you will normally move on to the lenders standard variable rate.
- Your payments will be variable and linked to a base rate, but fixed not to go above a certain level (the cap or sometimes called ceiling) during the period of the deal. At the end of the agreed period you will normally move to the lenders standard variable rate.
- Sometimes used in conjunction with a capped rate and/or a tracker, your payments are variable but will not fall below a certain level known as the collar.