Mortgage products & repayment

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

• AA repayment mortgage charges interest annually, while an interest-only mortgage charges it monthly
• BWith a repayment mortgage each payment reduces the capital as well as paying interest, whereas interest-only payments cover only interest✓
• COnly repayment mortgages can be secured on property
• DInterest-only mortgages always cost less in total

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?

• AIt is repaid by the lender out of the property's equity, once the term has ended
• BIt is automatically added on to the borrower's next mortgage when they come to move home
• CThe outstanding capital is automatically written off by the lender at the end of the term
• DThrough a separate, credible repayment strategy or vehicle arranged by the borrower✓

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?

• AThe interest rate is set for an agreed period, giving payment certainty during that time✓
• BThe interest rate tracks the Bank of England base rate plus a set margin for the whole term
• CThe rate is reset by the lender each year, based on the borrower's payment record
• DThe interest rate is set at the lender's discretion and moves whenever the lender changes its SVR

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.