Mortgage repayment

When you take out a mortgage you have two methods of repaying it.
Payment structure
‘Interest only’ or ‘Repayment structure’:

• With an ‘Interest only’ mortgages you don’t have to pay any portion of the loan back until the end of the loan term. You only have to pay interest on the loan every month.
• ‘Repayment structures’ are the more traditional way of paying mortgages. Every month you pay off a bit of the loan with interest. These payment schemes are designed so that by the end of the term, the mortgage is paid off completely.

Interest schemes
You will have an option of taking out a:

• Standard variable rate mortgage
  
• Fixed rate mortgage
  
• Capped rate mortgage
  
• Discounted rate mortgage
  
• Stepped rate mortgage
  
• Cashback deal mortgage

Standard variable rate mortgage
The interest rate set by your provider will vary roughly in accordance with the variation of the Bank of England’s Base rates. Over the past fifty years, they have both risen and fallen. Paying with this scheme of interest means that you reap the benefits if interest rates fall, but likewise if interest rates rise, you will find yourself paying more. In return for this instability, you won’t be liable to pay early redemption penalties if you pay off your mortgage early.
Fixed rate mortgage
With this, you pay a prearranged amount of interest on your loan every month. If the Bank of England’s base rates increase then you will not lose out by having to pay more interest. But if the base rates fall, you will be paying more than you have to. Fixed rate mortgages allow you to budget effectively, by knowing exactly how much money you will pay each month. In return for this stability, there are early redemption penalties and obligatory insurance policies.
Capped rate mortgage
These are similar to variable rate mortgages, but have cut off points. The amount of interest that you pay will vary as the Bank of England’s base interest rates vary, but you can have peace of mind knowing that the level of interest you pay will not go above or below a certain level. This means that if the bank of England’s base interest rate drops, you will pay less interest. And if it rises you will be exempt from paying above a prearranged maximum. This payment scheme allows you to take calculated risks, with the chance to budget. As with fixed rate mortgages, there is a price to pay for stability and capped rate mortgages carry early repayment penalties and sometimes obligatory insurance policies.
Discounted rate mortgage
With this kind of mortgage, you pay a discounted rate of the Bank of England’s base interest rate for a set period of time. When interest rates rise, you don’t pay the full interest, instead you pay the discounted price. Likewise, if interest rates falls you pay a discounted rate on the fallen price. Discounted rates normally apply only for a certain period of time, after which you pay the standard variable interest rate.
Stepped rate
There are two versions; a stepped rate and stepped discounted rate mortgage.

• A stepped rate refers to paying interest which is fixed at set stepped intervals. For example you pay interest at a fixed rate for one year and over the following years the rate changes at stepped intervals. The exact interest rates are known to you before you agree to the policy and you decide upon whether you want the interest rate steps to go up or down. This kind of plan can be beneficial if you are able to predict changes in your income.
• A stepped discounted rate works on the same principle, except that rather than paying a fixed interest rate which varies over the years, you pay a fixed discount on the base interest rate which varies over years.

Cashback
With this scheme, you can claim cashback, upon completion of your mortgage policy contract. Sometimes you may claim a specified amount of money such as several hundred pounds. Other times you can claim a percentage of the mortgage as cashback. In return, you usually have to accept a variable interest rate with no other discounts.