Repayment mortgages

A repayment mortgage is where you pay back the capital and the interest of your mortgage together. At the end of the mortgage term, you will have paid off the entire mortgage.

Interest only

With an interest-only mortgage, you initially only pay back the interest on a monthly basis and repay the capital (mortgage) at the end of the mortgage term, meaning your monthly repayments will be lower. People with interest only mortgages tend to invest the money they are saving with the view of paying off their mortgage at the end of the term.

NB. You’ll need to demonstrate to the lender that you’ll have some way of paying off the debt in the future. Interest-only mortgages are commonly chosen when you’re buying to let.

Fixed rate mortgages

The interest rate you pay will stay the same throughout the length of the deal no matter what happens to England’s interest rates.

Lenders normally advertise fixed rate mortgages as ‘two-year fix’ or ‘five-year fix’, along with the interest rate charged for that period.

Variable rate mortgages

With variable rate mortgages, the interest rate can change at any time and is not fixed. Interest payments are adjusted at a level above a specific benchmark or reference rate.

Variable rate mortgages can come in various forms:

Standard variable rate (SVR)

This is the normal interest rate a lender charges and it will last as long as the mortgage term or until another mortgage deal is taken out.

Changes in the interest rate might occur after a rise or fall in the base rate set by the Bank of England.

Lenders tend to automatically put you on their standard variable rate as soon as the term on a fixed term mortgage is over; this is often not the best rate available.

Discount mortgages

This is a discount of the lender’s SVR and usually only applies for a defined length of time, normally two or three years. Once you come to the end of that period, you start paying the more costly SVR, unless you remortgage onto a better deal.

Tracker mortgages

Tracker mortgages follow the Bank of England’s Base Rate and rise or fall along with it. If England’s base rate rises by 1% so will your mortgage.

There are ‘lifetime’ trackers for the life of the mortgage, and term trackers which may be for two or three years.

Offset mortgages

Offset mortgages link your savings and current account to your mortgage so you can reduce the amount of interest you pay on your outstanding mortgage balance.

You still repay your mortgage every month as usual, but Instead of earning interest on your savings, you will reduce the amount of interest charged on your mortgage.


*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.