Repayment or Interest Only?

The key decision you have to make is between a repayment or interest only mortgage - you are either paying only the interest on the money you have borrowed, or both the interest and a portion of the capital.

Repayment Mortgages

With a repayment mortgage your monthly repayments cover both capital and interest on the loan. No other repayment vehicle is needed, but your lender may insist on Life Insurance in case you die before the mortgage is cleared.

On the plus side, a repayment mortgage is simple, straightforward and easy to understand. It also avoids the risk of investing in the stock market for your repayment vehicle.

However, unlike a pension, ISA or endowment mortgage, repayment loans do not give you the opportunity to benefit from a rising stock market. Also, when remortgaging, people often choose another 25 year repayment mortgage, to keep the initial monthly costs down. This means that the overall total period of your mortgage debts combined increases over time.

Interest Only Mortgages

With an interest only mortgage, your monthly payments to the lender cover only the interest on the loan (i.e., they don't repay any of the capital). The full amount of the loan has to be repaid to the lender at the end of the term.

To ensure you can make this final payment, you invest additional funds in investments which are designed to generate enough (preferably more than enough) capital to repay the loan at the end of the term.

On the plus side, you can choose from a variety of investment vehicles, some of which can have tax advantages. And should you move or remortgage, your investment vehicle can usually be reallocated to the new mortgage.

However, unlike a repayment mortgage, the total amount of your debt does not reduce over time. And there is no guarantee that your chosen investment vehicle will grow sufficiently to repay your loan (although you can usually top up your contributions to investments as you go along if this looks likely to be the case). Cavendish Finanacial Solutions & Eastbourne Mortgage Services do not provide investment advice.

Standard Variable Rate (SVR)

The simplest form of loan is one which sets its interest rate according to the lender's standard variable rate, or SVR. With a loan like this, your interest payments are likely to rise or fall every time there is a change in the Bank of England's base rate. However, lenders don't always pass on the change in Base Rate - this can be to your disadvantage if the rate falls but your interest rate doesn't.

Most borrowers are transferred to their lender's SVR once their initial promotional rate period comes to an end.

Pros
There are usually no early repayment charges on these loans.

Cons
The unpredictability of interest rate movements makes it hard to plan your finances, and the costs of your mortgage may rise rapidly if interest rates go up.

Discount Rate

A discount mortgage offers a reduction ("discount") of a given amount on the lender's standard variable rate. If the SVR changes, the rate you pay will fluctuate in line with the change but at the same level of discount (e.g. 0.5% below SVR).

Usually, the greater the discount is the shorter the period of discount will be. After the discount finishes, the loan reverts in most cases to the lender's SVR.

Pros
You can make a significant saving on the standard variable rate.

Cons
Discount mortgages often incorporate significant early repayment charges, which may make it expensive for you to remortgage to another rate or lender.

 

Fixed Rate

A fixed rate loan charges a set rate of interest for a predetermined period, and then usually reverts to the lender's standard variable rate. The fixed rate will often be very competitive, however when you revert to the lender's standard variable rate you'll find that this is much higher.

Pros
A fixed rate loan offers you the security of knowing how much you'll be repaying during the initial period which can make budgeting much easier.

Cons
If the Bank Base Rate is dropping, your fixed rate may actually prove to be more expensive than a discount or tracker rate. E.g. you may tie in to a fixed rate which is the "best ever" but the market may continue to drop, leaving you on a higher rate but unable to move due to early repayment charges.

Capped

A capped rate will not rise above a certain level for the cap period - offering similar security to the fixed rate. You can have confidence that your interest rate will not exceed the cap, whatever happens to the lender's standard variable rate. The initial rate is usually competitive, however the deal will often also incorporate early repayment charges.

Pros
A capped rate offers you the security of knowing that your monthly payments will not rise beyond a certain level during the initial rate period, and therefore it will be easier for you to budget than it would were you on a tracker or variable rate.

Cons
As a payback for the security of the capped rate, rates are often higher than a fixed rate and the initial cap term seldom lasts longer than 2 or 3 years.

 

Tracker

A tracker rate gives you the certainty of knowing the rate you pay will move automatically in line with Bank Base Rates. You benefit straight away from any reduction in Bank Base Rate, even if the lender delays reducing its standard variable rate to reflect the reduction.

Tracker rates often track Bank Base Rate by a certain percentage, e.g. Bank Base plus 0.75% for the full term of the mortgage.

Many tracker products also offer flexible terms.

Pros
A tracker rate means that you immediately benefit from any reduction in Bank Base Rate - which is particularly beneficial in times of low Base Rates.

Cons
If the Bank Base Rate increases, your interest rate will also move up, while those on capped or fixed rates keep their low rate for longer.

As well as having one of the above interest rate features, mortgages often offer a number of other options, which can help you make the decision on what is best for you and your circumstances.

Flexible Mortgages

A flexible mortgage allows you to vary your monthly repayments. Depending on the flexibility of the particular mortgage, you can, without charge:

The flexibility is conditional - usually you have to follow (or exceed) a predetermined repayment schedule.

TOP TIP:
Look out for a mortgage which may not officially be "flexible" but still allows the ability to make overpayments.

Cashback Mortgages

A cashback mortgage pays out an upfront lump sum when the mortgage is taken out. This sum can then by used to pay, for example, for home furnishings or pay off a credit card debt.

You get cash just when you need it, at a relatively competitive rate compared to most credit cards or other short-term loans.

If you do take out a cashback mortgage you will often find that the interest rate is the lender's standard variable rate - the disadvantage of the cashback is the lack of flexibility or competitiveness on the interest rate.

Offset Mortgages

Like current account mortgages, offset products allow you to offset the balance of your mortgage against any funds in a savings and/or current account held with the same lender, and pay interest (calculated on a daily basis) on the net balance between the accounts.

Self certification Mortgages

Ideal for the self employed, where you may not have time to provide full evidence of income, also suitable for employed individuals that have two jobs or variable elements of income such as commisssion.

Sub Prime Mortgages

Usually for clients with past or poor credit, ranging form late payments, defaults CCJ’s, IvA’s and even rpocessions.

Buy to let

Whether you are a first time landlord or a seasoned professional we have a scheme that suits your needs.

About Us

Established in 1997, we have been providing Independent Mortgage Advice through our highly qualified professional staff. With well established relationships with UK mortgage providers we are recognized as a leading brokerage providing impartial & friendly advice on all aspects of mortgage finance. In addition to this we provide advice on protection products that run along in conjunction with this.

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