The following text is designed to give you a basic understanding of all the different components that make up a mortgage. Information correct as of June 2020.
Types of Mortgages
We can provide advice on the following:
First Time Buyer Mortgages
Types of Interest Rates
The interest rate is the most important part of any mortgage. It is the main factor as to what the payment for the mortgage will be. It is important to understand what type of interest rate you are taking because as seen in the past, when things change, this could upset your budget per month.
The different types of interest include:
Fixed Rate – This is the most common type of interest rate and provides security in terms of the monthly mortgage payment, these are typically offered on a 2-5 years period. There are Early Repayment Penalty for breaking the deal within the chosen period.
Tracker Rate – A tracker rate follows a named rate like BofE or LIBOR rates and stays in line with these, i.e. BofE + 1%. If the named rate changes then the tracker rate will change as well with the set margin.
Standard Variable Rate – You will borrow at the lenders normal rate of interest. Nothing special here and normally no Early Repayment Penalty. The rate will vary as the market changes.
Discounted Rate – You get a discount on the lenders Standard Variable Rate for a given period, usually between 2-5 years. There are usually Early Repayment Penalty for breaking the deal within the period of the discount.
Capped Rate – This type of interest rate places an upper limit on which the rate can rise too and still allows you to take advantage of rate reductions. This will follow a set rate made by the lender. Early Repayment Penalty may apply from lender to lender.
Lenders are very inventive in what is a very competitive market and are always trying to break new grounds. The attractiveness of such offers would depend upon your situation. All such offers need to be very carefully evaluated given your own circumstances.
Early Repayment Penalty
As previously mentioned in Types of Interest Rates lenders will charge an Early Repayment Penalty for when deals are broken. This means if you take out a mortgage interest rate for a 2-year period and repay the mortgage in full or part of the mortgage above the lenders allowable threshold, they will charge a fee to make up lost interest. These fees are typically scaled as a percentage of the loan taken out (1-5% of the loan). For example, if you take out a loan of £100,000 with a 3% Early Repayment Penalty, and repay the full loan, you will have an additional charge of £3,000.
Lengths of Mortgages
When discussing the length of a mortgage there are two distinct features to consider. Firstly, we have the term which is how long the lender will commit to lend the money for the mortgage. The length of this term differs from person to person depending on their individual plans. In addition, you will need to fit each lender’s criteria for the acceptable time they will lend for. As an industry standard for a residential mortgage, the maximum age is 70 as this is when most people will retire. The term of the mortgage will also reflect the monthly payment for mortgages which are on or have an element of capital repayment as this is the length of which the mortgage is to be repaid.
Secondly, we have the length of the interest rate will apply for which is commonly referred to the initial period. We mentioned this in the Types of Interest Rates as lenders typically offer 2-5-year interest rate deals which directly affects the Early Repayment Penalties.
There are two main repayment types, these are capital repayment or interest only. In addition to these, a Part & Part option is available which is a combination of both.
Capital Repayment – This means that you will slowly be repaying the capital and interest on a monthly basis. A combination of the interest rate and term will affect the amount on a monthly basis. This most common in residential mortgages.
Interest Only – This means that you are ONLY paying the interest on the mortgage on a monthly basis and will still owe the capital at the end of the term. This is most common for BTL mortgages but can be available for certain individuals on a residential mortgage.
Part & Part – This is a combination of both. For example, a £100,000 mortgage on a part and part basis with a 50/50 split, means month by month you will be repaying the capital on £50,000 along with the interest only on the other half. As with the interest only, this is available for certain individuals on a residential mortgage.
Before choosing the right repayment method for, this will be discussed in detail before any application is made.
Not all mortgages are straight forward, and some are more complex than others. Two of the most common types of these mortgages are ‘Offset’ & ‘Debt Consolidation Mortgages’.
Offset Mortgages – These types of mortgages are offered by few lenders and are designed for people who have surplus cash. These work by the lender offsetting any interest on your savings deposits against the interest due on your mortgage. They are popular but not for everyone.
Debt Consolidation Mortgages - These can be ideal for the right type of person – which is someone who has gone through a tough time but is now financially stable and confident to support a mortgage. They can be very expensive as in many cases you will securing your unsecured debts (i.e. credit card, personal loans etc.). The risk is that the property may be repossessed if the mortgage payments are not met.
These types of mortgages are not ideal for everyone and whether these will be right for you is our mortgages adviser’s role to identify and explain.
Think carefully before securing other debts against your home
Before taking out a mortgage you will need to be aware of the fees associated with each deal. The most common types of fees are the Lender’s Arrangement/Booking Fee, Higher Lending Charge, Valuation Fee, Solicitor and Broker Fee:
Arrangement/Booking Fee – This is the most common type of fee associated with any mortgage. They vary in cost from lender to lender and the amount depends on the type of mortgage you need and the complexity. The exact fees will be outlined before any mortgage is taken out.
Higher Lending Charge – Some lenders may ask for a higher additional fee for people who are borrowing a high percentage of the property value. This is for additional security as it is a higher risk for the lender.
Valuation Fee – Valuation fees are charged by the lender for them to instruct a valuation on the subject property. The fees scale depending on the property value and some lenders even offer these for free to attract more business. In addition to these, you may want to instruct your own valuation as many lenders do not disclose the reports, so it's worth the extra cost to make sure the property has no underlying issues.
Solicitor Fees – These are charged by the solicitor for them to conduct the conveyancing for when you are buying or remortgage a property. They will vary from firm to firm. If you do not have a solicitor, we can recommend and help you find a suitable solicitor. In some cases, lenders will offer a free solicitor, this is mostly found when remortgaging a property.
Broker – This is the fee charged by us and will be discussed at the start of the process.
A mortgage adviser's job is to identify the best overall package for you, the associated fees are part of that process.
In summary, selecting the right type of mortgage is a complex process as it is a constantly evolving market and it is the role of our mortgage advisers to help find the right one that suits your needs and goals.
If you would like to discuss further, feel free to contact us by phone or email and we will be happy to help.
This is for information purposes only and should not be used to apply for any lending.
A MORTGAGE IS A LOAN SECURED AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
COMMERICAL BUY TO LET MORTGAGE ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU REMORTGAGE