Mortgage products & repayment

What is the fundamental difference between a repayment (capital and interest) mortgage and an interest-only mortgage?

• A A repayment mortgage never charges interest
• B With a repayment mortgage each payment reduces the capital as well as paying interest, whereas interest-only payments cover only interest ✓
• C Interest-only mortgages always cost less in total
• D Only repayment mortgages can be secured on property

Answer: On a repayment mortgage each monthly payment includes both interest and a portion of capital, so the balance reduces to zero by the end of the term. On interest-only the capital remains outstanding and must be repaid separately at the end.

With an interest-only mortgage, how is the capital intended to be repaid at the end of the term?

• A It is automatically written off by the lender
• B Through a separate, credible repayment strategy or vehicle arranged by the borrower ✓
• C It is added to the next mortgage automatically
• D It never has to be repaid

Answer: Interest-only borrowers must have a credible plan to repay the outstanding capital, such as savings, investments or the sale of an asset. Lenders must check that such a strategy exists and is plausible.

What is the defining feature of a fixed-rate mortgage?

• A The interest rate can change at any time at the lender's discretion
• B The interest rate is set for an agreed period, giving payment certainty during that time ✓
• C The rate always tracks the Bank of England base rate
• D There are never any early repayment charges

Answer: A fixed-rate mortgage holds the interest rate constant for a set period, providing certainty over payments. It often carries early repayment charges during the fixed period.

How does a tracker mortgage determine its interest rate?

• A It is fixed for the whole term
• B It follows a specified external reference rate, such as the Bank of England base rate, plus a set margin ✓
• C It is set entirely at the lender's discretion each month
• D It only changes once every ten years

Answer: A tracker rate moves directly in line with a stated external rate (commonly the base rate) plus a fixed margin, so payments rise and fall as that reference rate changes.

What characterises a discount mortgage?

• A A reduction off the lender's standard variable rate for a set period ✓
• B A rate that is always lower than the base rate
• C A mortgage with no interest for the first year guaranteed by law
• D A fixed rate that can never change

Answer: A discount mortgage offers a set reduction off the lender's standard variable rate (SVR) for a period. Because the SVR can move, the actual rate the borrower pays can still vary.

What is a lender's Standard Variable Rate (SVR)?

• A A rate fixed by the FCA for all lenders
• B The lender's own default variable rate, which the borrower often reverts to after an initial deal ends ✓
• C A rate that can never be changed once set
• D A rate that only applies to interest-only mortgages

Answer: The SVR is the lender's default variable rate that a borrower typically moves onto once a fixed, tracker or discount deal ends. The lender can change its SVR at its discretion.