Useful Guide

Monthly payments can go up and down as the interest rate follows an external rate, usually the Bank Of England base rate. Typically, your interest rate is set at a fixed rate higher than the Bank of England (BoE) base rate – ie. ‘base rate plus 1.50%’ for an initial period. This means the interest rate will be 1.50% higher than the BoE base rate during this initial period and then after this time, you will be switched to the lender’s variable rate. The benefit of this type mortgage is that your payments can go down but a downside is that they can also go up so budgeting for this is something to consider.

Monthly payments can go up or down as the interest rate can do the same.

There are three main types – Standard variable mortgages (SVR), tracker rate mortgages and discounted mortgages.

SVR – this is usually the rate you move onto after your initial interest rate ends. Typically, this is higher than any other rate so your payments can jump up significantly but this mortgage would not incur an Early Repayment Charge should you wish to either pay off a large lump sum of your mortgage or fully repay before the mortgage term ends.

Discounted – you will pay the standard variable rate (SVR) minus a set percentage. Generally the same ‘rule of thumb’ is applied on this type of mortgage as with a Tracker rate mortgage but with your rate being defined by the lender’s standard variable rate (SVR) rather than the Bank of England base rate.

Utilise your savings to reduce your mortgage balance or your mortgage term. These can often be higher in rate than other mortgage schemes but they a good way of using any savings you may have. For example, if your mortgage balance is £300,000 and you have £50,000 in savings, this could reduce your mortgage balance to £250,000. You could then choose to lower your payments or keep your monthly payments the same and reduce your term. You have access to your savings at any time.

Monthly payments cover the interest only without reducing the mortgage balance. Available for residential homeowners and buy to let landlords but typically the process for a buy to let interest only mortgage is easier than that of a homeowner as lenders have a less stringent criteria with buy to let mortgages due to the property being an investment. A larger deposit than other mortgage schemes is normally required and the lender will need proof that the loan can be repaid through a specific source & criteria as defined by them. This could be investment, savings or sale of property but each lender has their own requirements for interest only. Beneficial for keeping monthly costs to a minimum but as the lenders need larger deposits and sources for repaying the loan are very specific, this is not suitable to everyone.