Repayment vs. interest-only
Over the term of your mortgage, every month, you steadily pay back the money you’ve borrowed, along with interest on however much capital you have left. At the end of the mortgage term, you’ll have paid off the entire loan. The amount of money you have left to pay is also called ‘the capital’, which is why repayment mortgages are also called capital and interest mortgages.
Over the term of your loan, you don’t actually pay off any of the mortgage – just the interest on it. Your monthly payments will be lower, but won’t make a dent in the loan itself. At the end of your term, you have to pay the total amount in full. Usually, people with an interest only mortgage will invest their mortgage, which they’ll then use to pay the mortgage off at the end of the term.
Fixed rate vs. the different types of variable rates
Fixed rate mortgages
‘Rate’ refers to your interest rate. With a fixed rate mortgage, your lender guarantees your interest rate will stay the same for a set amount of time. You can choose either:
- A fixed rate mortgage with an initial period (usually 2, 3, or 5 years), where you pay a set interest rate for a set period of time, after which that rate expires. When that happens, you can remortgage to a new fixed deal (if you don't, your lender will slip you onto their standard variable rate – more about that below)
- Or, a mortgage with a rate that runs over the whole term of your mortgage. With a full term fixed rate mortgage (right now, that's just Habito One), your fixed interest rate lasts for your whole mortgage term, so it never expires.
Standard variable rate (SVR) mortgages
SVR is a lender’s default, bog-standard interest rate – no deals, bells or whistles attached. Each lender is free to set their own SVR, and adjust it how and when they like. Technically, there isn’t a mortgage called an ‘SVR mortgage’ – it’s just what you could call a mortgage out of a deal period. After their deal expires, a lot of people find themselves on an SVR mortgage by default, which might not be the best rate for them.
Discounted rate mortgages
Over a set period of time, you get a discount on the lender’s SVR. This is a type of variable rate, so the amount you pay each month can change if the lender changes their SVR, which they’re free to do as they like.
Tracker rates are a type of variable rate, which means you could pay a different amount to your lender each month. Tracker rates work by following a particular interest rate to determine what you pay each month (for example, the Bank of England base rate), then adding a fixed amount on top. If the base rate goes up or down, so does your interest rate.
Capped rate mortgages
These are variable mortgages, but with a cap on how high the interest rate can rise. Usually, the interest rate is higher than a tracker mortgage – so you might end up paying extra for that peace of mind. (These aren’t common these days.)
These usually have terms that let you overpay and underpay (pay more or less than the monthly amount you agreed with your lender) and even take a payment holiday (miss a few monthly payments) if you need to. The price for this flexibility is usually a higher interest rate. There are different types of flexible mortgage – an offset mortgage (see below) is one.
A way to use your savings to reduce the amount of interest you pay on your mortgage. You have to turn your mortgage into an offset mortgage, then open a current or savings account with your mortgage lender and link that account and your mortgage up. Say you’ve got £10,000 in your savings account, and £100,000 left to pay on your mortgage. With an offset mortgage you only need to pay interest on (£100,000 – £10,000 =) £90,000 of your mortgage.