Mortgage products, rates, fees and repayment structures
Domain 2 - Mortgage products, rates, fees and repayment structures
This domain tests whether you can explain how the balance is repaid, how the rate behaves, and what the client actually pays in fees - then compare products on total cost rather than headline rate.
Repayment structures
Capital repayment: each payment covers interest and capital, and the balance falls to zero at the end of term. Interest-only: payments cover interest only, with capital repaid by a specified vehicle (endowment, ISA, pension lump sum, sale of another property) and the lender must see a credible strategy. Part-and-part splits the loan, combining certainty of repayment with lower outgoings. Offset and current account mortgages use savings to reduce the interest-bearing balance - tax-efficient, but usually fee-bearing. Flexible features include overpayment, underpayment, payment holidays and drawdown. Interest is normally calculated daily on the outstanding balance, so overpayments save interest immediately.
Rate structures
Fixed: certainty for the fixed period, an early repayment charge, and no benefit if rates fall. Tracker: Bank of England base rate plus a margin, moving automatically. Discount: standard variable rate minus a set margin. SVR: the lender's discretionary rate. Capped: cannot exceed a ceiling but can fall. Collared: cannot fall below a floor. Deferred or stepped rates front-load a low rate and later jump.
Fees to disclose
Product or arrangement fee (payable upfront or added to the loan), booking fee, valuation fee, legal fee, CHAPS fee, exit or administration fee, higher lending charge (now rare), and the early repayment charge - typically a percentage of the original loan during the fixed period, often with a 10% annual overpayment allowance.
Worked example
£200,000 capital repayment at 4.5% over 25 years: monthly rate 0.375%, 300 payments; payment = 200,000 × 0.00375 ÷ (1 − 1.00375^−300) ≈ £1,112. Total paid ≈ £333,600, so interest ≈ £133,600. Add a 3% ERC on £180,000 outstanding = £5,400 to redeem during the fixed period - always compare the ERC with the saving from switching.
Traps
Quoting the APR as if it were the pay rate; ignoring fees when comparing; assuming overpayments are unlimited; forgetting the ERC runs to the end of the fixed period even after a sale; and recommending interest-only without a verified vehicle.