Types of Mortgage Rates

Some Mortgage Rate Types in the UK

A mortgage is a loan provided by a lender to a borrower, who uses the loan proceeds to purchase a home. Most mortgages require putting forth a down payment of at least 10% of the purchase price as well as paying the loan back over a period of 15 to 30 years. While there are different variations of each, most UK mortgages are either repayment mortgages or interest only mortgages.

The most common of all UK mortgage rate types is a repayment mortgage rate.

It is called a repayment mortgage because over time the mortgage is repaid. A repayment mortgage is divided in capital payments, which pay down the mortgage balance, and interest payments, which is the money you are paying to borrow the capital. Every month a portion of the mortgage payment goes to both capital and interest. As the loan gets paid down, more money of each payment is applied towards capital each month.

Each repayment loan has a determined amortization schedule, which notes how long it will take for the loan to be repaid. A typical repayment period is normally 15 or 30 years. A shorter repayment period will require higher monthly payments, but will save money in interest payments over the life of the loan. The repayment mortgage payment is fixed for the life of the loan and is calculated by factoring in the repayment period, interest rates, and initial mortgage balance.

The second most common UK mortgage rate type is an interest only mortgage rate.

With an interest only mortgage the borrower’s payment goes 100% towards the mortgage’s interest. Interest only loan payments never pay down capital and therefore the original mortgage balance remains the same forever. The payments of interest only mortgages are normally much less than repayment mortgages, but if only minimum payments are made the mortgage balanced will never decrease and the home will never be fully owned by the borrower.

The interest charged in a UK mortgage can have a significant impact on the mortgage payment. Most borrowers select a fixed rate interest payment which means the interest rate will remain the same for a set period of time. Others select variable interest rate mortgages which are more risky because their mortgage’s interest rates can rise at any time. Some lenders offer capped rates, which places a maximum interest rate on the loan, but allows the borrower to benefit if interest rates fall.