Mortgages – The Basics

A mortgage is a loan taken out to buy property or land. The loan is 'secured' against the value of your home until it's paid off.

There are two main ways to repay a mortgage, here we explain each:

  • With a repayment mortgage, every month you pay back both the interest on your mortgage AND some of the loan itself. By the end of the mortgage term, you have paid off the entire debt.
  • With an interest-only mortgage, you only pay back the interest on your loan. This means your monthly payments are much lower, but you will still need to pay off the loan at the end of the mortgage term.

Some of the things to consider when choosing the repayment method for your mortgage:

Capital Repayment

  • Cheaper. You will pay less interest overall with a repayment mortgage and, as the years go on, you may have access to better interest rates. This is because you will constantly be building up equity in your home as you pay off the capital borrowed, so when you remortgage you'll qualify for better interest rates.
  • Peace of mind. As long as you keep up repayments, you are guaranteed to own your home at the end of your mortgage term.
  • Simple. No need to worry about how your investments are performing.
  • Higher repayments. Because you are paying off the capital of your loan as well as the interest you will pay back more each month.

Mr Mortgages will advise you based on your circumstances, attitude to risk and other factors what the best method or repaying your mortgage will be.


  • Lower monthly payments. As you are only paying back the interest on your loan your monthly payments will be far lower than with a repayment mortgage.
  • Control over your investments. You can decide how you save to repay the capital of your mortgage. You could put the money you save each month into home improvements as well as putting a little each month into a savings plan.
  • More expensive. With a repayment mortgage every year the amount of interest you owe decreases as it is being paid on a smaller and smaller loan, but with an interest-only mortgage the capital owed isn't shrinking so you continue to pay interest on the full amount.
  • One day you will have to pay. At the end of your mortgage you will still owe the lender the initial amount you borrowed. So, while you are enjoying smaller monthly repayments you need to have a plan in place for how you will pay back the capital.

Mortgage Products

There are several different types of product available. Here is a brief explanation on the main ones

Fixed Rate

The interest rate remains the same throughout the period of the deal – typically one to five years, though it is possible to get ten year fixed rates. If you opt for a fixed-rate, you'll have the security of knowing exactly how much your mortgage will cost you for a set period of time.

You can calculate how much your mortgage is going to cost by using our mortgage calculator.

Your mortgage payments will remain the same, even if interest rates changed. This makes it great for budgeting. 

You are tied in for the length of the deal, so if interest rates fall you can't take advantage of them. For example, if you opt for a five year fixed-rate deal, you will be tied in until the fixed term ends. If you want to get out of the mortgage before then, you'll be charged a hefty penalty – often thousands of pounds.

So before you apply for a fixed rate mortgage, think about how long you are happy to be locked in for. 

Tracker Rate

The interest rate on a tracker mortgage is linked to the Bank of England base rate or maybe some other rate like the specific bank's base rate. So if the base rate changes, your mortgage rate will change.

As with fixed rate mortgages, trackers are available over different terms: most commonly two or five years. With these deals, you'll be charged a penalty if you want to get out of the mortgage during the term.

You can also get lifetime, or term, trackers and these are often completely penalty free so they are very flexible and can be a great option if you don't want to be tied into your mortgage.

If interest rates drop, your payment will drop in accordance with the rate it is linked to

Although trackers are variable rate mortgages, it's easy to understand what rate you'll be paying because they are directly linked to the base rate. Therefore, the rate, and your monthly payments, will only change if the Bank of England or bank changes it's base rate.

You don't have the same security with a tracker that you get with a fixed mortgage because the rate is variable. This means you have to be prepared for the fact that your monthly repayments could go up – and it's really important to make sure you'll be able to still afford your mortgage if this happens. If money is tight and you need to budget carefully, a fixed rate mortgage will probably be a better option.

Discount mortgage

Trackers aren't the only type of variable mortgage. Discounts are another. However, unlike trackers the interest rate isn't linked to the Bank of England base rate. Instead, it's linked to the lender's standard variable rate (SVR) and this is a significant difference because lenders can change their SVR even if there has been no change in the base rate.

Discount mortgages are available over different terms – typically one to five years – and as with trackers and fixed rate deals you will probably be charged a penalty if you want to get out of the deal during the term.

Mr Mortgages will advise you on the most suitable product based on your circumstances, current interest rates and many other factors, leave it to us to guide you.

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