We know that mortgage Jargon is a little confusing to most, and the daunting process of house buying can leave you feeling overwhelmed. All mortgages function in a similar way, yet certain factors can differ between products. These factors include things like fees, Interest Rates and repayment methods.
We have put together a quick and easy guide to explain all the different TYPES of mortgages available here in the UK. We will cover the difference between an Interest-Only and a repayment mortgage, Fixed-rate mortgages, Variable rate mortgages, and many other things in between.
The Key topics we will talk about today are:
What is a repayment Mortgage?
A Repayment mortgage is made up of both the Capital repayment and Interest. The capital refers to the overall outstanding loan amount on your mortgage. Your monthly payments will go towards decreasing the capital, as well as paying some interest to the Lender. The aim is to pay back the original loan (plus interest) over the term you agreed when you took out your original mortgage.
Almost every type of mortgage is a Repayment Mortgage, especially when the mortgage is for your residential home. The most common exception to a repayment mortgage is an Interest-only Mortgage, which we will dive into next.
What is an Interest-Only Mortgage?
As we mentioned above, the mortgage payments of a repayment mortgage are made up of both capital and interest. As the name says… An interest-only mortgage exclusively includes the interest being paid within the mortgage payments, across the term. This means that the capital amount/outstanding loan will never decrease. Instead, the loan is paid back in full at the end of the term using a credible repayment vehicle.
One advantage of interest-only mortgage is the lower monthly payments (as no capital is being paid off turn the term), however you will need to be sure that your repayment strategy can accumulate enough money throughout the term to pay back what you owe. And since you are paying back interest on the whole loan, rather than a decreasing amount, an interest-only deal may end up costing more than a repayment in the long run.
Residential Mortgage
The clue is in the name with this one. A residential mortgage refers to any property in which you intend to live in. You are able to have second residential properties like a holiday home, and also a main residential property. There is no limit on how many second homes a person can have, however getting a second home can be a little trickier as you will need to be able to afford it and prove to a lender that it is not an investment property.
Buy To Let (BTL) Mortgages
This category of mortgages is aimed at prospective landlords who are purchasing a property to rent out for others to live in, rather than use as their own residence. Both interest only and repayment mortgages can be used when purchasing buy to let properties, but most landlords tend to use interest-only to keep their monthly payments down and use the rent they receive as an income.
Fixed Rate Mortgages
In a fixed rate mortgage, interest rates are fixed for a set amount of time, and during that set time, the rate will not be affected by the bank of England’s base rate fluctuation.
Typically, fixed rates last for 2 to 10 years. During this time, you will know exactly how much your payments are each month which is settling for buyers who want a degree of certainty regarding monthly commitments. The downside, however, with being locked in for a fixed period at a uniformed interest rate is the risk that variable rate (see next section) mortgages become cheaper than your current rate. This is more common in a volatile housing market subject to large scale change. Fortunately, interest rates have steadied quite considerably since 2008 with interest rates being very low to encourage the purchasing of property.
Conversely, If the Bank of England’s Interest rate rises during your fixed term, there will be no effect to your payments, and you could be saving money each month. Once you have come to the end of your fixed term period, you would be automatically switched onto the lender’s standard variable rate which could be significantly higher than your current fixed interest rate. However, you have the option of switching onto a different product with the same lender or re-mortgaging with a new lender- whichever is the best deal for you at the time. This is something that we will help you with as a customer, as we always follow up with our clients 4 months in advance of their fixed rates coming to an end, to review their options.
Variable Rate Mortgages
Variable Rate Mortgages have an interest rate that can shift up and down at any point in time. There is no period of time where you will be locked into a term like a fixed rate mortgage, and therefore your monthly payment is always subject to change. This mortgage type is affected by the bank of England Base Rate, as well as some other factors.
There is more than just the one type of variable rate mortgage out there, and for each type, the interest rate is calculated in a slightly different way. This gives some advantages and disadvantages depending on your specific situation. Let us have a look at the different type of variable rates out there and see who they are most suitable for.
What is a Standard Variable Rate Mortgage?
A Standard Variable Rate (SVR) mortgage has an interest rate that is set by the lender. Each lender has a different SVR, and it is not directly related to the Bank of England. A lender is able to increase and decrease the mortgage rate that you are paying on a month-to-month basis which would make it difficult to budget for the future. Alternatively, this can be quite a good option if you do not want any tie-ins or to be subject to future penalties.
The SVR is also the rate in which a lender would transfer you onto automatically after a fixed-rate deal has expired- providing you didn’t switch onto a new product.
2.What is a Discount Mortgage?
A discount mortgage would see you paying a reduced version of your lender’s SVR (Standard Variable Rate). The amount of discount would be fixed (eg 2.5%) but the SVR is constantly varying. For example: if the SVR is 4.5% and the discount rate is 2.5%, this would make your mortgage rate 2%. However, if the SVR increased to 5%, your rate would increase to 2.5%.
Most discounted mortgages are only available for an introductory term, whereby you would be switched onto the lenders SVR after that term. These discounts can also be staggered, meaning you will begin with the best discount, and then switch onto a slightly lesser discount, and so on, until you are on the lenders SVR. Many discount mortgages are capped, which means that no matter what happens to the lenders SVR, there will be a maximum and minimum that the interest rate must stay within.
3. What is a Tracker mortgage?
A tracker mortgage is a type of mortgage where the interest rate is made up of the current Bank of England base interest rate, plus an additional margin set by your lender. For example, if the base rate is 0.5%, you might pay that plus 3% for a rate of 3.5%. This means that when the base rate falls, your mortgage rate will ‘track’ it downwards and you will pay less. However, the same happens when the base rate rises, so you could end up paying a higher amount each month.
Most tracker mortgages are often offered with introductory deals, where you’ll be on the tracker rate for a set period of years, though there are some ‘lifetime’ deals that last for the duration of your term. Lenders tend to transfer you to their own SVR once the introductory deal is finished. In addition, some lenders will set a minimum rate for you to pay, no matter how much the base rate drops. This is known as a ‘collar’ rate.
Help to Buy Scheme Mortgages
The Help to Buy Scheme has been set up by the UK government as an initiative to help more people become homeowners. The old scheme ended earlier this year, and a new scheme has replaced it- set to run until 2023, with some slight alterations.
The concept is the same. This is that the government will loan you 20% of the property’s value so that you can secure a 75% mortgage with only a 5% deposit of your own. The government’s equity loan will be interest free for the first 5 years, from which after this point you would start paying interest on the loan, as a separate payment to your mortgage.
Key Features of the scheme:
NEW BUILD ONLY
First time buyers ONLY! This means if you have a joint application, both parties must be first time buyers.
House Price caps per region. See below the list of house price caps per region in the UK.
REGION
MAXIMUM PROPERTY PRICE
North East £186,100
North West £224,400
Yorkshire & the Humber £228,100
East Midlands £261,900
West Midlands £255,600
East of England £407,400
London £600,000
South East £437,600
South West £349,000
Joint Mortgages
This type of mortgage is one that will allow you to take out a mortgage with one or more other individuals. Each person who is named on the mortgage agreement will be responsible for the repayment and will decide on an equity split between themselves. You will be able to apply for joint mortgage deals in most of the mortgage types discussed above.
Most commonly, joint mortgages are taken out between couples looking to purchase a home together. These products are however also open to groups of more than 2 people- so could be a group of 4 friends for example who want to buy a home. Please note there cannot be more than 4 individuals party to a mortgage, and it will be at the lenders discretion as to how many can apply.
Joint Mortgages make it possible to use all parties’ incomes when looking at affordability, usually increasing the lending capacity. Just like a regular mortgage application, a lender will look at your earnings, credit history, and monthly spend to calculate how much you can borrow, but they will do this for each person and come up with a combined offer.
Having more than one person may also allow you to combine your savings and put down a higher deposit which can give you the access to more favourable terms and rates.
No matter if you are moving home, a first-time buyer, looking for Help to Buy guidance or you and a partner want to take out a buy-to-let mortgage together, the team at Tony Lenderyou Mortgages can provide help and advice to find best joint deal. We will help you through every stage of your application, giving you peace of mind when buying property.
Offset Mortgages
An offset mortgage will allow you to link your mortgage and your savings together to reduce the amount of interest you are charged. This works by ‘offsetting’ the value of your savings account against what you borrowed for your mortgage loan, which means you are only left to pay interest on the amount remaining. This in turn, makes your amount of interest lower as it is applied to a reduced figure.
Eg. if you have £20,000 in savings and a £120,000 mortgage, you will only pay interest on £100,000. At an interest rate of 2%, that means you would be paying £2,000 in interest per annum, as opposed to £2,400.
Many lenders will offer you the choice of either reducing your monthly payments over the same loan duration or keeping the same level of payments and pay your loan over a shorter duration. Also note that when you offset your savings, you will not be able to earn interest on them. However, you do not pay tax on them either, which can be beneficial if you are in a high tax bracket.
95% Mortgages
A 95% mortgage is a mortgage that allows you to borrow 95% of the property value with just a 5% deposit, meaning your loan to value ratio (LTV) will be 95%. For instance, you could purchase a property with a value of £100,000 and secure a loan for £95,000 with only a £5,000 deposit.
There has been a new Mortgage Guarantee Scheme (MGS)introduced by the government on the 1st April 2021 that is designed to encourage banks to start offering 95% loans again, after almost all of them stopped doing so during the pandemic. Under the MGS terms, the government guarantees the portion of the mortgage that is over 80% (ie. 15% for 95% LTV). Do not worry though, this isn’t complicated for you as a consumer, as all it means is that the government will be partially compensating the lender directly for any homeowner that defaults (failure to pay) on their mortgage.
Contact us here at Tony Lenderyou Mortgages on 01661 821155 or via our website, Instagram, (@tonylenderyoumortgages) or email, tony@tlmortgages.co.uk if you want our help in securing a mortgage!
You must be aware that your home may be repossessed if you do not keep up repayments on your mortgage. You may have to pay penalties to your existing lender if you re-mortgage before the end of a mortgage deal. Think carefully about securing other debts against your home.