Buying a new property is such an exciting time but finding a mortgage can be a stressful and long process. There are many mortgage lenders and mortgage deals to explore before finding the right mortgage for you. A mortgage is such a big financial commitment which will affect you in the future years to come. It is worth knowing some of the terms used to understand what options you have. If you have no idea where to begin it is always worth seeking out expert advice from a mortgage broker.
Fixed Rate Mortgage
This is the most common type of mortgage you will come across. It is a fixed rate of interest for a predetermined amount of time. The rate being fixed means that it will not change over the agreed time period, no matter what the circumstance. This fixed rate will not last throughout your whole mortgage however and is often referred to as an ‘initial benefit period’.
Typically, this fixed rate will last for up to five years. It is beneficial as you will have peace of mind that your monthly payments will stay the same.
Variable Rate Mortgage
When it comes to variable rate mortgages, the rate is not set. The interest rate is subject to increase and decrease throughout the mortgage. If the interest rates go up then so will your repayment amount.
There are different types of variable rate the most common being ‘tracker’ mortgages. It is called a tracker rate because it tracks the Bank of England’s base rate.
Lenders typically offer a rate which is 1% above the Bank of England base rate as an initial benefit period. This lasts between two to five years.
After this period is up, you will automatically move onto the Standard Variable Rate (SVR). This rate is fixed to the Bank Of England rate. Variable rate mortgages can save you money, but, if the Bank of England Base rate increases, so will your mortgage payments.
A discounted rate mortgage refers to a discount from the Standard Variable Rate. This rate usually lasts between two to five years. This discounted rate will end and usually the mortgage will move onto the SVR rate set by the lender.
You should be prepared to be tied to the lender for a period of time. If you do decide to leave the deal early, you may end up paying fees.
You can offset things such as savings or funds in a current account against your outstanding mortgage balance. The most basic form of offsetting is a mortgage account and a separate savings account which runs alongside the account.
Anything in the savings account is offset against the mortgage balance for the purpose of calculating interest. For example, a £150,000 mortgage alongside £50,000 pounds in savings – you will only be charged interest on £100,000 of your mortgage. This is because those savings are offsetting.
It is a really good way to manage your finances and your savings are free to use as you normally would. You are in charge of managing your mortgage and how much interest that you pay.
Another account you can offset is called a ‘one account’, your mortgage, savings and current account are all in one account. Whenever money goes into your current account, the savings account gets offset against the outstanding mortgage balance. This is for the purpose of calculating interest.
These accounts are not as readily available as they used to be but are still on the mortgage market. They are very good for people who know how to manage their money, for example if you are self-employed.
Repayment Mortgage / Capital Repayment
Capital repayment refers to the act of paying back the money that you have borrowed over the term of your mortgage. You may hear it referred to as a ‘repayment mortgage’ too. This is one of the safest ways to repay any debt and to buy your property outright.
If you maintain monthly mortgage repayments, you are guaranteed to be paying the debt. Therefore it is likely you will own the property at the end of the mortgage term.
Interest Only Mortgage
Interest only mortgages are commonly used for buy-to-let properties. Interest only mortgages refer to repaying the interest rate over the term of the mortgage. This does not deduct from the original sum of money you borrowed from the lender.
Your monthly mortgage repayments will be lower if you decide upon this option. Keep in mind that you will need to pay the mortgage in full at the end of the term.
Flexible / Cash Back Mortgage
Flexible mortgages are similar to offset mortgages. Lenders are constantly competing so offer something called a flexible mortgage with incentives such as cash back. Common cashback is normally around £500 payable to your solicitor on completion of your mortgage.
Although this option sounds appealing it is important to keep in mind the risks. Some lenders will not allow you to make an overpayment on your mortgage meaning you are tied to them for longer. Yet on the other hand, some lenders can allow you to take a payment holiday from your mortgage. Flexible and Cash Back mortgages vary in criteria so it is worth knowing all details before committing to the deal.
Porting Your Mortgage
Porting is when you move the current rates of your existing mortgage over to your new one. You can decide to go through your existing lender or move onto a new one. The process is usually simple if your property is equal to or less than the price of your existing home.
At the end of an initial benefit period of a mortgage you will need to remortgage. You can remortgage with your existing lender or switch to a new one. You can transfer your old mortgage to a new one for the sole purpose of obtaining a lower cost mortgage.
You may want to remortgage to raise some capital or release some equity from the property. The most common reason for remortgaging is typically home improvements and extension but it could also be to consolidate debt.
Mortgage brokers are very useful when it comes to mortgages, especially if you do not know where to begin. Mortgage brokers can offer their expert knowledge of the mortgage market, whilst taking your circumstances into account. They make sure you understand what you are getting yourself into before recommending mortgages that fit your needs. Mortgages are a big financial commitment so a little bit of expert advice can go a really long way.
Peter has been absolutely fantastic! Nothing has been too much trouble and he always explained everything simply and effectively. You are never made to feel rushed, he takes his time. It has been a massive support to us, having someone with Peters passion and expertise in our corner helping us navigate our way through mortgages and life insurance. We have felt fully confident placing our trust in him and his recommendations. We will always recommend him where we can. Thank you Peter.
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