Mortgages are loans which are intended to help buyers purchase residential and commercial property. A mortgage is a ‘secured’ loan, which means that the loan is secured against the value of the property being purchased until the mortgage is paid off.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SOME FORMS OF BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
With a repayment mortgage, the borrower is lent a sum of money which is secured by deed against a specific property. The borrower is required to make regular (usually monthly) repayments to the lender, with each repayment including interest accrued under the loan and a sum of the original loan capital which is repaid.
Over time, the proportion of the monthly repayment that is interest reduces as the outstanding loan balance also reduces. Whereas almost all of the first monthly repayment of a 25-year repayment mortgage might be interest, the last five years are comprised largely of capital repayment.
At the end of the mortgage period, the property is owned ‘free of lien’, and no further mortgage payments are due. The property can be sold without the permission of the former mortgagee once the mortgage has been removed from the title.
Interest-only mortgages require that only the accruing interest is paid to the lender over the term of the mortgage. This reduces the monthly mortgage payment as no element of the loan is ever repaid. However, at the end of the loan period (or when the mortgagor sells), the whole loan sum must be repaid out of the proceeds.
The amount of interest paid on an interest-only mortgage is significantly more than under a repayment mortgage. Furthermore, at the end of the loan, the property is probably going to need to be sold in order to pay back the lender, leaving the homeowner without their home!
In order to overcome this issue, it has been usual to link a savings or investment (such as a pension) to the mortgage into which the borrower pays a monthly sum which should accrue over time to a sum large enough to pay off the outstanding loan at the end of the term.
Specifically designed for those new to the housing market, first-time buyer’s mortgages usually require a smaller deposit and might have other benefits aimed at helping the new home buyer by reducing capital outlay.
This can be of any of the types mentioned above but is most likely to be either repayment or interest-only. They are usually faster to organise because the borrower has a track record of repayments to check against.
Help-to-Buy loans have been supported by the Government in an effort to support the housing market and help less affluent homebuyers in areas where property values are high. These may take the form of Help-to-Buy Equity Loans or Mortgage Guarantees and may be offered in conjunction with Help-to-Buy ISA products.
Available to homeowners over the age of 55, equity release schemes are deferred payment mortgages used to help the owner of an asset to release some of its value without selling it and thus being able to benefit from its ownership for a period of time, usually until death.
This is a lifetime mortgage. To understand the features and risks, please ask for a personalised illustration. Check that this mortgage will meet your needs if you want to move or sell your home or you want your family to inherit it. If you are in any doubt, seek independent advice.
Buy-to-Let mortgages are aimed specifically at the buy-to-let market. Loan-to-value ratios are usually lower, and there are specific affordability tests linked to the borrower’s income and the rental value of the property being mortgaged. Interest rates are usually higher for this product.
Remortgages are available to homeowners with equity in their property and who wish to raise more money against the property’s increased value without selling and liquidating the home’s value. In essence, remortgaging is the act of switching your existing mortgage to a new deal, either with your existing lender or a different provider. You’re not moving house, and the new mortgage is still secured against the same property.
The more equity you have and the lower your loan to value (LTV), the more competitive the rates you’ll qualify for.
There can be any number of reasons for making the switch, including:
At this current time, when interest rates are at a historic low, especially if you have good credit and have been a reliable borrower, there are good remortgage deals to be had so make sure you shop around for the best rates.
Many mortgages might also have terms which set the interest rate. Common types include:
Standard Variable Rate mortgages (SVR) are linked to the lender’s standard variable rate which can go up or down. In practice, it usually follows the Bank of England Base Rate. The Bank of England’s Base Rate is adjusted regularly by the Bank of England’s Monetary Policy Committee.
Variable Rate linked to LIBOR. This is again linked, but this type to LIBOR, which stands for Intercontinental Exchange London Interbank Offered Rate. This is a rate set in the market, between banks.
Fixed Rate mortgages are set at a fixed rate, usually for a period of up to five years, after which time the rate becomes variable and is linked either to LIBOR, the Bank of England Base Rate or the lender’s own variable rate.
Capped Rate mortgages are, as the name suggests, capped from rising, but unlike a fixed rate mortgage, the rate is free to fall. In today’s mortgage market with historically low interest rates, the advantages of a capped rate over a fixed rate are limited.
Discounted Rate mortgages usually start at a reduced rate (below the lender’s SVR). After a period of time (usually up to three years), the discounted rate ceases and the rate returns to a more standard rate, usually the lender’s SVR. These rates allow first-time buyers to benefit from lower mortgage payments in the first few years of a loan, but other charges and fees may be higher.