Mortgages are not complicated – simply borrow money and pay the cash back with interest over an agreed period.

If a borrower has trouble repaying the loan, the lender can sell the home the mortgage is secured against to settle the debt.

Lots of mortgage rate and repayment choices can be confusing for borrowers.

Mortgage rates

Borrowers looking for a mortgage will face a bewildering array of products from banks and building societies.

Go through the figures carefully, looking at the pros and cons of each package to decide which is best for you.

Standard variable rate

The most popular packages are a variation on the lender’s ‘standard variable rate’ or SVR. SVR is generally the Bank of England base rate plus an additional amount.

For instance, if the Bank of England base rate is 5%, lenders may set their SVR at 5.5% or 5.75%.

The most popular mortgage packages are:

Fixed rate
Mortgages with a rate below SVR set for between one and five years. The fixed rate is paid regardless of any changes in SVR.

Tracker
A tracker is set at a percentage rate above or below the Bank of England base rate for the mortgage’s life.
For example, a tracker is Bank of England base rate plus 0.75%. If the base rate is 5%, the borrower pays 5.75%. If the rate falls to 4.5%, the mortgage rate falls as well, or ‘tracks’ the base rate, by reducing to 5.25%.

The next three mortgages are variations on the tracker theme:

Discount
A discount mortgage rate is set lower than SVR. If SVR rises or falls, the discount rate follows like a tracker for a set period.

If the discount is 1% less than SVR, and SVR is 5%, then the rate paid is 4%. If SVR goes up to 5.25%, the mortgage rate climbs to 4.25%.

Capped
Capped mortgages are like discounts, but cannot rise above a certain rate.
If a mortgage rate is capped at 5.25% and is 1% less than SVR, if SVR rises to 5.5%, the most the borrower pays is 5.25%.

If SVR falls to 5%, the rate falls to 4%.

Collared
Collared is the opposite of capped. The mortgage rate rises and falls like a capped rate, but instead of not rising above a set rate; a collared rate does not fall below a set figure.

If a mortgage rate is collared at 5.25% and is 1% less than SVR, if SVR falls to 5.5%, the lowest rate for the collared period is 5.25%.

If SVR rises to 5%, the rate rises to 6%.
At the end of the set period, the mortgage rate reverts to the SVR for all these products.

Repaying a mortgage

Borrowers can opt between three mortgage repayment methods:

Capital and repayment
This is paying back the money owed with some of the interest every month, so at the end of the loan period, all the debt is cleared

Interest only
Only interest is repaid during the loan period. Monthly payments are lower than capital and repayment mortgages because none of the debt is cleared.

Combination
Borrowers can choose a split option of part capital and repayment and part interest only.
For interest only and combination options, some arrangement is needed at the end of the mortgage period to repay the debt.

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For More information on specific Banks use these links

• Alliance & Leicester
• Barclays
• Capital One
• Child Trust Fund
• First Direct
• HSBC
• Post Office
• Tesco Savings

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