A mortgage is a loan secured against a property. A mortgage comprises the amount of money borrowed, which is the mortgage debt, and the interest charged for having the debt. There are two methods of repaying the mortgage:-
Interest Only.

Repayment Each month, a repayment mortgage pays the interest charged for having the mortgage debt that month and pays off part of the debt. At the start of the mortgage period, most of the repayments go into paying the interest charged and just a little off the debt. But as part of the debt is paid off each month, it reduces and therefore the interest charged is reduced. In the last years of the mortgage most of the payments go towards paying off the debt. A life assurance policy is often taken out to cover the outstanding amount on the mortgage. There are several type of repayment mortgages which are described in the next section.
Interest Only Each month only the interest charged for having the mortgage debt is paid. An additional amount is paid into a separate investment fund to repay the mortgage debt at the end of the period. The hope is that in good years and with good fund management there will be a surplus. The investment fund is normally in the form of an endowment policy which includes life insurance that will repay the mortgage if the policy holder dies.

Variable Rate The mortgage interest rate is set one or two per cent above the bank rate and varies accordingly.
Fixed Rate The mortgage interest rate is fixed for a set period of time, usually two to five years, though occassionally longer, up to 25 years. If you decide to change the terms of your mortgage within the fixed rate period you will usually incur an early redemption penalty. At the end of the agreed fixed rate period the outstanding mortage will revert to the variable rate of interest.
Offset Interest from your savings is used to offset the interest payments due on your mortgage and personal loans. As you do not physically receive the interest on your savings, it is not taxed.
Current Account Your mortgage, other loans and savings are all held in one account into which you pay your salary. This account acts as your current account. At the end of the month any amount left is deducted from your mortgage. A limit is set as to how much you can borrow. The interest due is calculated daily. It allows payments to be flexible, with periods of under and over payment to suit the borrower's changing financial circumstances. However care must be taken not to allow the interest payments to build up if regular repayments are not made. On the other side it allows a mortgage to be repaid early if extra payments are made.
Capped Rate The mortgage interest rate cannot go above an agreed level if mortgage rates rise, but they can fall if the interest rates drop. However the mortgage interest rates may fall more slowly than if it had been a normal repayment mortgage.
Discounted Rate A mortgage with a guaranteed reduction in the variable rate (say 2 per cent below the variable rate) for a fixed period of time. Normally the variable rate for the rest of the period of repaying the mortgage is slightly higher than the standard rate to pay for the period of reduced payments. Often there is a redemption penalty if the lender tries to change mortgages too soon to avoid paying the higher rate. The discounted rate is often useful for first time buyers who have a lot of initial expenses and if starting out on a good career path expect their wages to increase in later years.

Mortgage Calculator

UK Property Links

UK Property Books & Atlases

Return to Top

(c) Compiled by B V & T M Wood.


 Main Index