Mortgage Types

Get in touch today to discuss the most suitable solution
for you and your family.

Mortgage Types
Mortgage Types

Mortgage Types – Jargon Busting

Errol Hall from Mortgage Broker Services breaks down some of the most common terms surrounding mortgages…

What is a fixed rate mortgage?

Mortgages that have payments that remain the same for an agreed fixed period are known as fixed rate mortgages. They can be fixed for two, three, five, or sometimes even ten years. If during the fixed period you want to switch to a better deal, you will be charged a fee, and also may be liable to pay an early repayment charge if you overpay during the fixed rate period. At the end of that period, the lender will usually switch you on to it’s standard variable rate (sometimes referred to as an SVR).

Fixed rate mortgages make budgeting much easier because your payments will stay the same during the fixed rate period, even if interest rates go up. On the other hand, it also means that you won’t benefit if interest rates go down. This type of mortgage is quite popular with first time buyers due to the stability of knowing the payments won’t change for a definitive period.

What is a variable rate?

The interest on a variable rate mortgage fluctuates in line with the mortgage provider’s standard variable rate, which each lender has and they set this themselves. The lender’s standard variable rate (SVR) is usually quite high, so it’s not really advisable to stay at this rate.

You probably won’t get penalised if you decide to change lenders or switch products. You may also be able to pay additional amounts without incurring charges, as a variable rate is just a rate that you’re not tied into.

What is a tracker rate?

A tracker rate is another variable product, which tracks the Bank of England base rate.This means that your payments will vary, and you will pay more if interest rates go up, and, of course, you’ll benefit when they go down.

Usually you are tied into this kind of mortgage deal for about two years, meaning you may have to pay a penalty to leave your lender, especially during a tracker period. You may also be liable to pay an overpayment charge if you overpay on the mortgage during a tracker period, although some trackers do not have tie-ins or penalties to make any changes.

Whilst a tracker mortgage may suit some people, it’s not a good choice if your budget won’t stretch to higher monthly payments.

What is a discounted rate?

A discounted rate is another type of variable mortgage rate, which is usually given to new mortgage applicants, as they offer a gentler start to your mortgage repayments at a time when money might be tight. It offers a special discount below the standard variable rate for a fixed period of two to five years, after which you’ll usually be switched to the full standard variable rate. Therefore, you must be confident that you’ll be able to afford your repayments when the discount period ends and the rate increases.

You may have to pay a penalty for both overpayments and earlier payment, and the lender may choose not to reduce or to delay reducing its variable rate, even if the base rate goes down.

What is an offset mortgage?

This type of mortgage is attractive to applicants with a high net worth. They are mortgages that are linked to savings accounts provided by the lender. Any funds that are placed into the savings account will reduce (or offset) the mortgage balance and interest you pay on it.

If you have a mortgage balance of £100,000, and an additional £20,000 in a savings account, your monthly repayments will be made on a balance of £80,000, which lowers the interest. If you want to withdraw from the savings account then you are able to, but then you won’t benefit from the offset mortgage payments.

Offset mortgages are generally more expensive than standard deals, however, they can reduce your monthly payments while still allowing you access to your savings.

Speak To An Expert

We provide professional, friendly and accessible advice and support throughout the mortgage application process, and are able to offer recommendations and referrals to trusted conveyancing and estate agent colleagues too.

What is the difference between capital repayment and interest-only mortgages?

Capital Repayment

With capital repayment, your repayments will go towards paying back both the capital and interest accumulated on your borrowing. The benefit of capital repayment is that you’ll be able to see your outstanding mortgage reducing each year, and you are also guaranteed that your mortgage debt will be fully repaid at the end of the mortgage term. Your payments will, however, be higher than an interest-only mortgage because you’ll be paying capital as well.

The shorter the term you pay your capital repayment mortgage over, the bigger your monthly payments will be. However, by choosing a longer term, whilst you may benefit from lower monthly payments, you will also pay more interest over the length of the mortgage term. It’s important to consider how soon you want to be mortgage free and weigh this up against the mortgage term that makes your monthly payments affordable.

Interest-only

An interest-only mortgage means that you only make interest payments to your lender every month, but nothing will be paid towards reducing the loan. You will therefore need to repay this in full at the end of your mortgage term, which will require you to make a separate investment or combination of investments to generate the capital required. Bear in mind that the value of investments can go up and you may not get back the original amount invested.

But if you fail to generate enough to repay your mortgage by the end of the mortgage term, you may be forced to sell your property. Some lenders will accept sale of the actual mortgaged property as a credible repayment vehicle, but obviously you will need to be willing to part with your home at the end of the term.

Interest-only mortgages are generally readily available on Buy to Let properties, mainly because they are self-funding. An interest-only mortgage might also appeal to you if you receive annual bonuses because your monthly repayments will be low, and when your bonuses come in, you can pay off the outstanding capital balance that way.

Some buy to let mortgages are not regulated by the Financial Conduct Authority.

What are the features of a flexible mortgage?

Flexible mortgages are normal mortgages with some extra features added. They allow you to overpay, underpay, take payment holidays and some offer cashback, which is usually paid on or up to a month after completion of a mortgage.

The overpayments option allows you to pay above your normal monthly repayment, usually up to 10% of the capital per year without any penalty. This can be a lump sum or regular monthly overpayments if you go beyond that 10%, you could be charged a fee if you pay beyond that barrier. This will reduce the outstanding mortgage balance and may enable you to pay the mortgage off sooner.

Payment breaks are another flexible feature and there are some mortgage products that will allow you to have a short break, you know, maybe a month off, twice a year. This could be useful at Christmas or other periods where a lot of spending occurs. Don’t forget, interest will continue to be charged once you’ve taken your break so your monthly payments could be higher once the break ends.

Payment holidays were also quite popular during the COVID pandemic. But Government guidance meant that lenders had to offer three to six months payment holidays, whereas usually lenders would only offer a month here or there, after you’ve had the mortgage for at least a minimum period.

What is a guarantor mortgage?

The guarantor mortgage allows a friend or family member to act as a guarantor for the loan. It’s really only offered by a few lenders. And as a guarantor , the person will be liable should the borrower miss loan payments.

What is a family assist mortgage?

This is a modern day version of the guarantor mortgage and is also known as a Joint Borrower Sole Proprietor (or JBSP) mortgage.This is where you take a mortgage with someone else, usually your parents or another family member, and all parties share joint responsibility for the mortgage payments, but only the main applicant actually owns the property and is named on the title deeds. This helps people to afford a bigger or better property as your family member’s income will be considered along with your own.

There are a couple of lenders that have schemes that would allow parents to use equity in their own home as a guarantee on your borrowing, but they are not very commonly used.

What is the Mortgage Guarantee Scheme?

This type of scheme has been available in the past, and it basically allows lenders to offer First Time Buyers up to 95% of the value of the property. The First Time Buyer will only need a 5% deposit, and the lender will feel safe in the fact that part of the loan will be guaranteed by the government. This gives them a bit more confidence to lend and therefore more 95% mortgages are readily available.

What is the Help to Buy Equity Loan Scheme?

With this scheme you can essentially purchase a property with a five percent deposit. You take out a Government loan of up to 20% (40% in London) and you take out a mortgage to cover the remaining balance.

The Government loan is interest free for the first five years and you start paying interest of 1.75% in year six. This may rise each year with inflation, but you can repay the Government loan at any time in 10% increments. A really helpful scheme for those looking to get onto the property ladder.

What is the Shared Ownership Scheme?

These are homes that are made available by housing associations and you can buy a minimum share of 10% of the property and up to a maximum of 75% initially. You need a minimum 10% deposit to purchase share and you pay rent to the housing association on the share that you don’t own

You can purchase further portions of equity, which is known as Staircasing, and you can buy up to 100% of the property over time. There are sometimes additional criteria that you may have to meet, such as having previously lived in the area that you’re buying in.

Speak To An Expert

We provide professional, friendly and accessible advice and support throughout the mortgage application process, and are able to offer recommendations and referrals to trusted conveyancing and estate agent colleagues too.

What are Right to Buy and Right to Acquire and how do they differ?

These are two similar schemes to help people who are local authority or housing association tenants in England to buy their home at a discount. Right to Buy applies to council tenants and Right to Acquire relates to housing association tenants.

Right to Buy

The discount that you are entitled to will vary depending on how long you’ve lived in the council property, the minimum term will be three years and the discount increases the longer you’ve rented the property for. If you want the right to buy property, the council has a utility that allows you to use your discount as a deposit. Some lenders may want you to put in an additional 5 or 10% of your own money, but others will accept the discount options.

Right to Acquire

The Right to Acquire scheme is very similar to Right to Buy, but for housing association tenants. The discounts are offered in a similar way to those on the Right to Buy, but are not usually as high of a discount as you would get from the council.

Do Mortgage Brokers charge for providing mortgage advice?

Mortgage Broker Services offer the initial consultation and mortgage advice phone consultations for no charge, and you shouldn’t really ever need to pay for this service. I do, of course, charge a fee once a mortgage offer has been provided to my clients, however, initial advice is free.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.