Rates and Repayments
When you take out a mortgage, you agree to three basic conditions:
- How you will repay the amount you have borrowed
- What interest rate you will pay on the loan
- How long the agreement is set up to last.
There are just three ways in which your mortgage can be set up to be repaid:
- Repayment: this is where your payments cover both the interest due and a portion of the loan. Essentially you are chipping away at your debt over the years with a view to it being paid off at the end of the agreed term, when you become the full owner of the property.
- Interest only: this is where you only pay the interest due on your loan and the amount borrowed remains due to be repaid at the end of the loan. This is broadly similar to paying rent, as you don’t achieve ownership of the property at the end of the term. It is your responsibility to ensure that you have the means to repay the mortgage debt at the end of the term. We can advise you on this.
- Repayment and Interest only: you can sometimes arrange to have the mortgage set up as part repayment and part interest only.
Interest rates also fall into two general categories:
- Fixed rate: the rate you will repay is fixed for an agreed period of time – usually between one and five years although longer periods may be possible. It can be useful for budgeting, but doesn’t take advantage of market changes and may revert to a higher rate after the end of the fixed period.
- Variable rate: there are a number of ways that the rate can be pitched, including tracking it parallel to the Bank of England Base Rate or capping it in relation to the Mortgage Lender’s standard rate. The parameters of the rate will normally be agreed for a period of two or three years.
In today’s flexible market, mortgage terms (ie the length of time you can hold your mortgage) can vary according to your needs. The standard 25-year mortgage is no longer the only option. First-time buyers or those with low budgets can opt for a longer term, whilst an increasing number of older people are taking out new mortgages for shorter terms. Repayments can be scheduled to continue into retirement, if needed, provided the necessary income can be assured. Our mortgage team can advise what term is the most suitable for you: contact us for your free initial mortgage consultation.