MORTGAGES
Mortgage Types/ Jargon Busting
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Your home may be repossessed if you do not keep up repayments on your mortgage.
What is a Fixed-rate Mortgage?
A Fixed-rate Mortgage is a contract between the client and the lender where they will ensure that the rate on your mortgage is fixed for a period of time. Usually, you can have these agreements over one, two, three, five, and even ten years.
Your monthly payments on your mortgage will remain the same during that Fixed-term, which helps you to budget. When the Fixed-rate ends you go onto the lender’s Standard Variable Rate.
What is a Variable-rate Mortgage?
With a Variable-rate, each lender dictates their own Standard Variable Rate of interest, which traditionally is a lot higher than any of the other deals you can get.
The downside of a Variable-rate is that you pay a higher rate of interest, but they’re probably one of the most flexible rates around because there are no tie ins, no penalties if you want to transfer from one lender to another.
The lender can, however, put their Standard Variable Rate of interest up and down, at any time.
What is a Tracker-rate Mortgage?
A tracker mortgage tends to be linked to the Bank of England base rate, which is currently 0.1%.
It has been a lot higher in the past, but currently, it’s very low. Andrew Bailey, the governor of the Bank of England, and the Monetary Policy Committee will decide whether the base rate goes up or down. A Tracker-rate follows the Bank of England base rate, so your mortgage payments go up and down with it.
What is a Discounted Rate Mortgage?
A Discounted Rate Mortgage is similar to a Tracker-rate, but it gives you a discount off the lender’s Standard Variable Rate. If the lender’s Standard Variable Rate is 5% and you’re getting a discount of 2.5% off the lender’s Standard Variable Rate, then you will be paying a rate of 2.5%.
The discounted rate is linked to the lender’s Standard Variable Rate, so changes in accordance with that. So if it rises to 6%, you still have a 2.5% discount, but your interest rate will then be 3.5%.
What is an Offset Mortgage?
Offset Mortgages have become popular over the last twenty years or so and it benefits people who have got savings and a mortgage. The Offset Mortgage utilises the balance in the applicant’s bank or building society to offset their mortgage interest. For example, if you have a mortgage of £100,000 and £50,000 in savings, the lender only charges you interest on the £50,000 of your mortgage.
The benefit of this is either that your monthly repayments are reduced as a result of lower interest liability or you pay the repayment as if there were no interest savings and reduce your capital a lot quicker.
What Mortgage Repayment types are there?
Capital Repayment
With a Capital Repayment Mortgage, every monthly payment you make consists of an element of the capital you originally borrowed and the interest that accrues on top.
As you make your way through your mortgage term, you will see the balance reduces continuously until at the end of your mortgage term you will be left with a zero balance.
Interest-only
With an Interest-only Mortgage, each monthly payment only pays the interest that you’ve accrued.
This means that at the end of your mortgage term, you are still left with the original loan to repay. Typically this is used for investors or anyone
that has a repayment vehicle, such as selling the investment property in order to clear the balance.
What Flexible Mortgage features are available?
Overpayments
Overpayments allow the client to be able to overpay on their mortgage. Most lenders will allow overpayments of up to 10% without any penalties at all.
So if you’ve inherited some money or have an additional sum of money available, most lenders allow you to overpay by 10% of your mortgage balance every year without any penalties, meaning you can finalise your mortgage more quickly.
Flexible Mortgage
With a Flexible Mortgage, you can overpay whenever you want, however much you want. So there’s no limit to the flexibility.
The difference is that lenders will charge you more for a flexible mortgage rate, than a traditional rate, because they know that you potentially could pay that off quite quickly. These are great mortgages, however, for those who have extra income regularly and want to pay off their mortgage without penalties.
Repayment Holiday
We’ve seen a lot of repayment holidays recently with the pandemic and the government has encouraged lenders to allow people to take payment breaks.
Always check with your lender, but if available, this gives you the ability not to have to make a mortgage payment in difficult financial situations.
Outside of the pandemic, maybe if you lose your job or something like that, however, lenders usually apply criteria to the break. There’s usually a maximum term that you can take a payment break for. Some lenders may say you’ve just got to cover the interest, rather than the whole repayment.
With flexible mortgages, where you’ve overpaid, you can usually then take a payment break. However, it’s strongly advisable to check that with your lender first before just going ahead, because it could have an impact on your credit score.
Porting
Porting your mortgage can be a good way to save costs on your mortgage. Many people think because they’re tied into a rate, they can’t move their mortgage deal during that period of time without paying a penalty.
Porting, however, lifts the mortgage from your current home and moves it to another property without any penalties.
You’re not breaking the contract if you port your mortgage, just moving it from property to property. You may need to borrow a bit more to complete that deal, which you then borrow from the same lender and top up your current mortgage.
If you have a great rate and you don’t want to lose it, porting allows you to move house when you’re still contracted on that rate, with the same lender.
Cashback
Cashback is used as a way to incentivise clients or incentivise them to take their mortgage products.
There are many forms of cashback, for example, a lender may give you cashback to pay for your solicitors’ costs so that you Remortgage with them. Some lenders will give First Time Buyers cash to help with their costs and some lenders will just give you a cash incentive at the end of the transaction if they move to them.
Schemes to help people get onto the property ladder
Guarantor Mortgage
There are not too many guarantor mortgages around nowadays. A typical example would be if somebody had credit issues in the past and is unable to get a mortgage to buy a property, parents with a near perfect credit history will be their guarantor, which means the lender uses their assets, either savings or their property, as security.
If the applicant were to miss some payments, then the mortgage payments and the responsibility would fall to the guarantor.
Family-assist Mortgage
Family-assist Mortgages tend to come in two different formats.
The first allows the client to borrow 100% of the property price, and their parents or other relatives put around 10% of the property price into a savings account with that mortgage lender, which they will be unable to access for a set period of time, usually two, three or five years, however, they would earn interest on it.
The second type is a Joint Borrower Sole Proprietor Mortgage, where the owner of the property is the sole owner, but the borrowers would be their plus, perhaps a parent, who would also add their income, when they’re not able to borrow enough on their own.
Help to Buy Equity Loan
With the Help to Buy Equity Loan, the applicant has to put a minimum of 5% down on the purchase price and the government loan them a maximum of 20% of the purchase price, meaning that the client would only need a 75% mortgage. At that Loan to Value, the interest rates are a bit lower and, therefore, so are monthly payments.
It’s only available on certain newbuild development sites. There’s no interest accrued on the loan and no repayments are required for the first five years, but from the sixth year, the loan becomes payable. The monthly repayment is also at a fixed interest rate, so the interest payments won’t fluctuate.
Shared Ownership Scheme
With the Shared Ownership Scheme, you become a homeowner, but the ownership of the property would be shared with a housing association.
For example for a house of £100,000, you could choose to buy 50% share and would only need a mortgage for the 50% that you own. It can be quite complicated, but mortgage brokers will help to explain additional options, such as staircasing, which allows you to purchase more of the property over time.
Right to Buy/Right to Acquire
Right to Buy is typically for council tenants and it gives them a discount on the price of the home they are living in, depending on the length of residency.
You don’t need a deposit if the affordability fits with the lender. If the market value of the property is £100,000 and your discount is 35%, they would offer you that property for £65,000. A mortgage lender that offers the Right to Buy Scheme would use the discount of £35,000 as your deposit.
Right to Acquire is very much the same thing, but is usually from employers, for example, military housing or NHS towers. The councils or the original homeowners retain the first rights to sale within the first five years to prevent people from profiting from the discount, however, the option to sell it back to them is there, if you really needed to.
Your home/property may be repossessed if you do not keep up repayments on your mortgage.
Some Buy-To-Let Mortgages are not regulated by the Financial Conduct Authority.
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