Interest only:
An interest-only mortgage is a type of home loan where, for a certain period, you only pay the interest on the loan, not the principal (the amount you borrowed). This means that during this initial period, your monthly payments are lower because you’re not paying down the loan balance. However, once the interest-only period ends, you’ll need to start paying both the principal and interest, which usually results in higher monthly payments.
Here’s a breakdown:
Interest-Only Period: This phase typically lasts 5, 7, or 10 years. During this time, your payments are lower because you’re only covering the interest, and the principal amount remains the same.
After the Interest-Only Period: Once this period ends, your mortgage will shift to a more traditional structure where you’ll need to start paying off the principal as well. This often leads to a significant increase in your monthly payments.
Risks: The main risk is that if you’re not prepared for the higher payments after the interest-only period, you could struggle to afford your mortgage. Also, because you’re not reducing the principal during the interest-only period, you won’t be building equity (ownership) in your home as you would with a traditional mortgage.
Who Might Use It: Interest-only mortgages might be appealing to people who expect their income to increase in the future, plan to sell the property before the interest-only period ends or want lower initial payments for investment purposes.
In summary, an interest-only mortgage can offer flexibility and lower payments upfront, but it comes with the risk of higher payments later.
Repayment:
Fixed – A fixed-rate mortgage has a set interest rate for a certain period. This is usually between 2 and 5 years but can be more. Fixed-rate mortgages help you budget your money by having consistent monthly payments. The good thing is your interest rate doesn’t go up if the Bank of England base rate rises. But it also doesn’t go down if the base rate drops.
Variable – (Standard Variable Rate, Tracker and Discounted)
Tracker – A tracker mortgage sets its interest rate above the Bank of England base rate. The interest rate will then rise or fall in line with the base rate. Some tracker deals are set for a fixed period, once the deal is over your mortgage goes back to the Standard Variable Rate. You can get a lifetime tracker deal set to last the whole of your mortgage term, unless you change the deal. Your repayments are likely to be less predictable than with a fixed-rate deal. But you may initially pay less interest than with a variable-rate deal.
Discounted – A discount rate mortgage has a variable interest rate set below the lender’s Standard Variable Rate and will rise and fall with it. This means your repayments could go up or down whenever the Standard Variable Rate does, but the discount size will remain the same. For example, if your lender’s Standard Variable Rose is 7% and your mortgage discount is 2%, your initial rate is 5%. If the Standard Variable Rate falls to 6%, with a discount still at 2%, your rate will then be at 4%. The discount is usually set for a fixed period – after that, you’re then switched to the lender’s Standard Variable Rate.
Capped – A capped-rate mortgage works much like a standard variable-rate mortgage. The interest you pay on your monthly mortgage repayments can go up or down, depending on where your mortgage provider decides to set its standard variable rate.
The difference with a capped-rate mortgage is that the interest rate can never go past a certain limit (e.g. the cap) during the deal. This is true even if the standard variable rate goes higher than this.
Essentially, you may want to think about a capped-rate mortgage as something in-between a variable-rate and a fixed-rate mortgage. Like with the latter, you know that your repayments will never go over a specific monthly rate. However, as opposed to fixed-rate deals, with a capped-rate mortgage you can benefit from rates and instalments potentially going down.
APRC Explained:
APRC stands for Annual Percentage Rate of Charge. It’s a way to compare mortgage costs, showing the total yearly cost of a mortgage, including interest and fees, expressed as a percentage. Think of it as the “all-in” cost of borrowing on a yearly basis. It’s useful because it helps you understand and compare different mortgage offers more easily, by reflecting the true cost of the mortgage over its entire term, making it simpler to see which deal is actually better.
