Residential mortgages

Types of mortgage and borrower

The world of residential mortgages can be a minefield to the uninitiated. This section aims to demystify all the names and different types available, so that when you apply for a mortgage, you do so feeling confident that you have made an informed choice. We also look at the different types of borrower to help you get an understanding of how lenders might view you!

Repayment Types

Interest only
Each month you pay only interest to the lender, meaning that the amount you owe does not reduce. To ensure that you can repay the mortgage at the end of the term, lenders are keen to understand how you plan to do this. Acceptable options include, but are not limited to, sale of the property, pension lump sums, endowments and savings. Interest only mortgages are harder to obtain than repayment mortgages and eligibility for these is complex.

Capital and interest
Each month you pay interest to the lender and also a small amount of capital which means that month on month, the amount you owe reduces, until eventually the debt is repaid.  The duration over which you pay the mortgage back can be up to 35 years, subject to the mortgage ending, generally speaking, before your 70th birthday.  

For most borrowers (and lenders) this is the preferred route.

Types of mortgage

A remortgage is a common process for mortgage holders and is when a new mortgage is taken out without moving home. Homeowners remortgage for a variety of reasons including:

• To release equity from a property
• To consolidate debts
• To move to a better mortgage rate
• To save money

A note of caution: Please be aware that when consolidating debts the funds will be repaid over the term of the mortgage, therefore the overall cost of repaying the loan is likely to be higher as the term of the loan is longer.

Most residential mortgage products are available for homeowners looking to remortgage, they are not usually different products. Remortgages can normally be for any type of mortgage, i.e. fixed rate mortgage, tracker mortgage, etc.

Knowing when to remortgage is very important. Borrowers (or their brokers) usually think about it around 6-8 weeks before their initial rate period comes to an end, although savvy borrowers regularly check to see if it’s worth remortgaging. If this sounds like too much to remember, we can check for you free of charge. Call us for more information.

Fixed rate mortgage
A fixed rate is where the rate of interest you will pay is set for a period of time.  Most lenders offer rates which are fixed for 2, 3 and 5 years, although some also offer 1 and 10 year rates.  They key here is that irrespective of what Bank of England Base rate and LIBOR are doing, your interest rate will remain the same for this period of time.  Once your fixed rate finishes, you will move onto the lenders Standard Variable Rate and, generally speaking, at this point borrowers will look to secure a new deal either with the same lender or remortgage to a new provider.

Discounted rate mortgage
A discounted rate is where the lender is providing you a discount from their Standard Variable Rate.  As with trackers, it is subject  to movement and can be for a period of 2, 3 or 5 years, for the term of the mortgage.

Tracker mortgage
A tracker is a rate which is tracking a different interest rate – usually the Bank of England Base Rate or LIBOR.  The key here is that these rates are subject to change and can move up or down.   You can take a deal which tracks for 2, 3 or 5 years and then moves onto the lenders Standard Variable Rate, or you may be able to take a product where it tracks for the term of the mortgage.

Offset mortgage
Sometimes called a current account mortgage, an offset mortgage uses the money you have in your savings to help you save on your mortgage payments - the more money you have in your savings the more you save on your mortgage payments.

The way an offset mortgage works is that the money in your savings and/or current accounts are used to reduce the mortgage balance on which you are charged interest. The great thing with an offset mortgage is that you can reduce your monthly mortgage payments or your mortgage term whilst still having instant access to your savings.

Currently savings rates are particularly poor and an offset mortgage can make your savings work harder for you than stuck in a savings account. It should be kept in mind however, that an offset mortgage can be beneficial at any time, not just when interest rates are low.

Here's an example of how an offset mortgage might work:

You have a mortgage of £170,000 and a total of £20,000 in your savings and current accounts, which can be offset against your mortgage. With an offset mortgage, your mortgage interest will now be calculated based on the net balance of £150,000. This could save you thousands of pounds over the life of your mortgage. With an offset mortgage you can work out exactly what's of greater benefit to you: reducing the term of the mortgage or reducing the monthly mortgage payments freeing up some much needed cash.

Cashback mortgage
A cashback mortgage normally gives you a lump sum cash amount when your mortgage begins. Cashback incentives only apply to certain mortgages and may be a fixed amount or a percentage of the mortgage. Cashback mortgages are not always available but can be great for borrowers requiring a lump sum to install a new kitchen or bathroom for example. The disadvantage of a cashback mortgage is that the interest rate is normally higher than average.

A capped rate is a variable rate, usually a tracker or a discounted rate, but which has the benefit of a maximum rate of interest.  For example, if the rate was capped at 5%,as long as the interest rate you were paying was below this amount it can go up and down, but it could not go over 5%, irrespective of rate movements.  Again, the capped rate would be in place for 2, 3 or 5 years before going back onto the lenders standard variable rate.

Drop lock mortgage
A drop lock mortgage is essentially a tracker mortgage with a difference. It allows you to start with a tracker and then you switch to a fixed rate loan if, or when, the Bank Rate rises. It is a way of keeping your monthly repayments at an affordable level if the Bank of England starts hiking rates.

For example, if you have tracker mortgage that is 3% above BBR, then right now you are paying 3.5% because Bank Rate is currently 0.5%. However, if interest rates start to rise, then the tracker mortgage becomes less attractive.

If Bank Rate was to go up to substantially then your monthly payments could become quite hefty. This is where the "drop lock" bit comes in... As Bank Rate starts to rise, you can choose to drop out of the tracker rate when interest rates are still at a level that you feel comfortable with and lock onto a rate that means a repayment that suits you.

One of the other appeals of the drop lock mortgage is that when you switch, there is normally no early repayment charge or redemption penalty.

The trouble with finding a drop lock mortgage is that many lenders don't actually call them that. You will have to look at a lenders' tracker products and see if the option to fix is available. Alternatively, ask us about this option when you are next looking for a mortgage.

Types of borrower

Depending upon your personal circumstances and residential mortgage requirements, lenders will identify you as a particular type of borrower. Understanding your borrowing type and requirements will help you to select the most suitable residential mortgage for you.

First time buyer
A person who has never had a mortgage before.

A person who owns his/her own home either with or without a mortgage.

A person who owns a property with a mortgage and is looking to refinance.

Large loan borrower
A person who is looking for a mortgage in excess of £500k.

Shared owner
In an industry with high property prices shared ownership helps people who cannot afford to buy a home outright. With shared ownership you purchase a percentage of a property with the help of a mortgage whilst a housing association or local authority will purchase the remaining share. You will pay a rent on the share which you do not own.

Overtime, you will be able to buy further shares of the property until you have bought enough shares to own the property outright. We'll make sure that you have all the help and support you require throughout the entire shared ownership buying process to make it as simple and hassle free as possible. We deal with every lender and shared ownership product in the UK, so we'll make sure you get the very best deal available.

Let to buy
Many people now choose to let their existing property rather than sell when they move into a new home.

The new mortgage lender will not necessarily take your existing mortgage into consideration as a commitment as long as the rent covers the existing mortgage payment.

A deposit maybe required for the new mortgage however this maybe released from the existing property by remortgaging or a secured loan.

You can rent out your existing property in order to buy another home locally or in a completely different location within the UK.

Let to buy is a really good way to retain your property if you're relocating as a result of a job or change of circumstance for a period of time and have a need to purchase a new property whilst you're away.

Let to buy is a way to retain your original property as an investment and benefit from the mortgage being paid by a tenant.

Let to buy can be of real benefit when used to break the buyers and sellers chain if you are having trouble selling your property or if you have little or no equity and would rather wait before selling.

Let to buy can be a start to building a property portfolio that you could benefit form in the future, acting like a form of long term pension provision, once the mortgage on the property is paid off.

The rules are different from buy to let as you may be able to borrow a higher proportion of the property value, which means you may need a smaller deposit or if you have plenty of equity in your current property possibly no deposit is required at all.

It is a requirement by the new mortgage lender that you ask for your existing mortgage lender to give permission to let to buy.

You must inform your building and contents insurer.

If your property is leasehold you will need to make sure that your lease has no restrictions on the letting of your property.


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