A buy to let Mortgage is used for the purpose of buying a house and then renting it to private tenants (full guide on renting to private tenants here). The Advantages of Buy to Let Mortgages are: Create a regular monthly income which is hopefully higher than monthly mortgage payments and costs Create an opportunity …
The importance of choosing the best mortgage for your needs cannot be overstated, with many of us overpaying.
Mortgages. There are many options – probably too many.
And the stakes are sky-high.
No pressure, of course.
For many people, a mortgage is a sure-fire way of plummeting into an eternity of debt. At least, it can feel that way. And, sadly, that’s often the reality if the wrong choice is made.
Case in hand, 10% of UK households spend on average £210 more than necessary each month on their mortgage!
There’s no two ways about it, a mortgage is a big deal and it can be terrifying when we dare to remind ourselves how far we remain in the red. Truly terrifying indeed.
When talking about something so important, scary and potentially life-changing, it’s a wonder that so many of us borrowers dedicate more time to researching the best hot-spots for our encroaching summer holiday in Ibiza than we spend on finding the right mortgage deal.
While our misplaced efforts might lead to an alcohol-fuelled week of fun, sun, mankinis and shameless pursuits – slacking on our mortgage search may result in the displeasure of maintaining an unsuitable mortgage, leaving our future finances in jeopardy along with any chance of an Ibiza 2.0.
So, let’s talk numbers.
Statistically, you are very unlikely to be one of the thousands of borrowers whose home gets repossessed each year, or to sink in the same boat as the 1.1% of borrowers who fall into mortgage arrears.
But, you definitely don’t want to join the ranks of the oblivious third – yes third – of borrowers who don’t have a scooby about their mortgage rate, and are therefore unlikely to have the most cost-effective deal.
To avoid those scoobyless-ranks, it’s vital that you understand what type of mortgage will suit you best. That’s precisely why we’ve taken the time and effort to wade through the messy world of mortgages and explain (clearly, we hope) your options.
Following intensive, brain-numbingly boring research, we’ve counted at least eight types of mortgage and gathered together the need-to-knows for each type, so you can make an informed indecision.
1. Fixed Mortgages
The one-liner: A borrower pays a fixed amount every month. What did you expect?!
Ideal borrower: Someone who enjoys the certainty of knowing exactly what they’ll pay over a contracted period of time.
Pros: Comes with an attractive low rate for a limited time known as an ‘incentive period’.
Cons: The low introductory rate will eventually expire at which point you will be forced to either remortgage or pay a higher rate (which is typically the lender’s ‘Standard
2. Variable Mortgages
The one-liner: A mortgage where the rate is often tied to the UK economy, in particular the UK base rate (interest rate), and therefore moves up or down accordingly.
Ideal borrower: Someone that wants to gamble on interest rates lowering in the foreseeable future.
Pros: Opportunity to benefit from reduced payments if interest rates drop.
Cons: Unsurprisingly, you’ll feel the wrath if rates decide to jump up. Another pitfall is that you may not necessarily pay the same amount each month, which can cause concern for those that like to keep a tight reign on their budgeting.
Types of Variable mortgages
To make matters more complicated (we understand mortgages aren’t easy), variable rate deals fall into three further categories: trackers, standard variable rates (SVRs) and discounts. Let’s quickly hop through them…
a) Tracker Mortgages
The mortgage interest rate will move inline with a fixed economic indicator – typically the Bank of England base rate. For example, if the base rate increases by 2%, then your interest rate will also increase by 2% and visa-versa if the base rate decreases.
b) Standard variable rate mortgages (SVRs)
Every lender will have their own SVR which they can adjust at their own accord, and these mortgages usually act like a tracker mortgage moving in line with the Bank of England base rate. However, unlike trackers, they’re not obligated to track an indicator, but can be adjusted at the lender’s discretion.
Typically, you can’t get SVR mortgages from the offset; it’s the rate which borrowers are thrown onto after their fixed rate mortgage expires – usually after two or three years.
Since the fixed period is known as the ‘introductory rate’, it’s safe to assume that the SVR is a rather unpleasant rate comparatively speaking.
c) Discount Rate Mortgages
A discounted mortgage sets the interest rate at a certain amount below the lender’s Standard Variable Mortgage rate. If the lender’s standard variable rate falls, then the discounted mortgage rate will also reduce.
Similarly to a fixed rate mortgage, the discount (i.e. lowered rate) only lasts for a short period, usually between two or three years. However, there are some lenders that offer longer discount periods, even lifetime options.
3. Joint Mortgages
The one-liner: The mortgage suited for couples (but not exclusive to; some lenders allow up to four people to get a joint mortgage).
Ideal borrower: Couples and groups of people who want to snuggle up and share liability.
Pros: The lender will take into account all salaries, which makes it easier to get a loan for a higher amount, and everyone is ‘jointly and severally liable’ for the debt.
Cons: Can cause domestic disputes and complications if one of you wanted to sell your share, or falls into financial turmoil.
4. Flexible Mortgages
The one-liner: Designed to allow flexibility in the amount people pay in their monthly repayments, which includes overpaying, underpaying, and borrowing money back.
Ideal borrower: Looking for ultimate flexibility, which can cater for the good, bad and butt-ugly times.
Pros: The ability to overpay (i.e. pay more than your agreed monthly repayment) without incurring early payment penalties, the result being clearing your debt quicker and paying less interest overall. And yes, the ability to take ‘payment holidays’ (i.e. skip some payments) when times are hard.
Cons: Most lenders won’t allow holiday payments unless you have overpaid first. There really isn’t such a thing as a free lunch, especially with mortgages.
5. Offset Mortgages
The one-liner: Your mortgage debt is offset against any cash savings you have (you’re still able to access your savings as normal). Usually it involves holding a current account and mortgage with the same financial institution.
Ideal borrower: For those with large cash savings under the mattress or laying lifeless in your bank.
Pros: It can significantly reduce the amount of interest you pay without actually reducing the balance of the debt. For example, if your mortgage debt is £100,000 and you have £10,000 in savings, then you only pay interest on £90,000 (but of course still owing the full £100,000).
Cons: While this sounds like an exciting proposition, the reality is that most offset mortgages usually come at a higher rate than standard mortgages, so it’s only really suitable for those with enough savings to offset a large portion of the debt. Not for the average Joe, unfortunately.
6. Guarantor Mortgages
The one-liner: Like a rental guarantor, except for mortgages. This mortgage requires a personal hero who will agree to make your payments if you fall into arrears. The guarantor signs a legal contract with your lender, despite not owning the property.
Ideal borrower: For when a lender denies you the mortgage because you don’t earn enough. Most suited to first-time buyers blessed with a strong support network and who can rely on family.
Pros: An alternative means to get a mortgage that’s financially beyond your reach (assuming you have a wealthy guarantor to get you across the line). It also allows you to unburden the guarantor once you’re in a better financial position.
Cons: The guarantor will have to prove their own credibility and show they fully understand what they’re signing up to. The lender will require they seek independent legal advice, and possibly request a lump deposit held in escrow. Not to mention, it can destroy relationships if you fail to make your payments, because then the lender can legally pursue the guarantor.
7. Self-employed/Self-Certification Mortgage (Now extinct)
The one-liner: You have to talk about self-certification mortgages in the past tense. They’ve been banned in the UK since 2011, but a crafty loophole means you could still get one from lenders based in Europe. A word of caution: you should be really careful if you decide to use an overseas lender – the Financial Conduct Authority (FCA) even issued this warning about the risks.
Ideal borrower: Self-certification mortgages are no longer available but as long as you can prove your income as a self-employed person you have access to the same range of mortgage products as anyone else.
Pros: Once upon a time this mortgage enabled people to borrow without having to prove their income. Pro no longer.
Cons: Originally aimed at a tiny minority of self-employed people with special circumstances, they ended up being sold much more widely and were outlawed because lenders and borrowers were abusing them.
8. Halal Mortgages
The one-liner: A halal ‘mortgage’ isn’t really a mortgage. It’s a Sharia-compliant home purchase plan designed to help Muslims purchase property and sidestep the need to borrow money with interest payments. Your bank will purchase your property on your behalf and either lease it back to you or sell it back at a higher price. You pay back the sum in installments.
Ideal borrower: Observant Muslims who have struggled to get a foot on the ladder because under Sharia law, borrowing and lending money in return for interest is forbidden.
Pros: Doesn’t involve borrowing money. You’re an observant Muslim, and you can still get a mortgage (kind of).
Cons: They’re not widely available. The rate you pay back to the provider may fluctuate.
- David Hollingworth of L&C Mortgages: “Households in the capital overspend by the most, typically paying £266 a month more than necessary. Those in the North pay £201 more than needed, while households in the Midlands and the south of England could save £222 a month if they were on a different deal. Research revealed that a further 1.1m households are effectively throwing away a collective £2.78bn by sitting on the wrong mortgage deal.
- MSE: “It’s not the bricks and mortar, but the mortgage that keeps the roof above most homeowners’ heads. Yet many struggle to meet their repayments, leading to arrears and the fear of repossession.”
- Mirror: “in a 2016 study of 2,000 UK adults by financial services specialists Momentum UK, just 40% of people knew the remaining balance of their loan.”
- According to the BSA there were 7,700 repossession of properties in the UK in 2016.
- Guardian: “Ultra-low interest rates may have kept the cost of mortgage loans lower than expected by the government’s official forecaster, the Office for Budget Responsibility.”
- Guardian: “More than 40% of mortgage borrowers have never experienced an increase in interest rates and the fear is that many in this group would be unable to cope.”
- “Guardian: “The government helped to revive the mortgage market after the banking crash with its Help to Buy scheme, which subsidised the deposits of first time buyers. It also backed a Bank of England project to support lenders offering cut-price mortgage rates to buyers and re-mortgagers. Critics of the schemes believe they have encouraged thousands of people who could not afford a mortgage under more normal conditions to take on huge debts.”
- http://debthelpplan.co.uk/25/scary-uk-debt-statistics – On average, a typical UK household also holds over £115,000 in mortgage debt. Much of this debt is actually interest. Most homes will attract an average of £4,650 of interest every year.
- What are mortgage arrears? FCS: “Arrears are defined as instances when any contractual payments, of capital, interest fees or other charges, are overdue at
the reporting date. Arrears reported in the MLAR data relate only to loans where the amount of actual arrears is 1.5% or more of the borrower’s current loan balance. For example, if the loan balance is £100,000 arrears in respect of the loan will only be captured in MLAR once they have reached £1,500 or more.” (https://www.fca.org.uk/publication/data/mlar-statistics-technical-notes.pdf)
A Cashback mortgage is a type of mortgage where a borrower gets the funds to buy a house but also a cash lump sum. This can be up to 6% of the cost of house. For example if you borrow £100,000 to buy a house. You could take out a mortgage for £106,000 so you …
Similar to a Fixed Rate Mortgage is a Capped or Collar Mortgage This is a combination of a fixed and variable mortgage. It means that if the bas rate rises your mortgage rate won’t go above a certain level. However if the base rate falls you can benefit from a reduction in your interest payments. …
Have you always wanted to own a pub or restaurant? Do you need to relocate an office or factory and want to own the premises? If so a commercial mortgage may be the answer to raising the extra funds you need. Below is a selection of the types of commercial mortgage that may help fund …
These works on a similar principle to an offset mortgage. The difference is that all the balances – mortgages and savings are combined into one account. Basically the idea is that as money enters into your current account it reduces your mortgage and therefore you will be asked for less mortgage payments. It is deemed …
As the name suggest this is a mortgage where the repayment levels are fixed for a certain number of years. This means that if the Bank of England Base rate goes up or down your mortgage will be unaffected. Advantage of Fixed rate Mortgage If you want the certainty of a fixed monthly payment. If …
Equity is the value you have in your house or flat after any debt has been taken off. If the property is worth £150,000 and the outstanding mortgage is £50,000 you have £100,000 equity in the property. If there is no mortgage you have £150,000 equity in the property you own. Owners over 60 can …
Flexible mortgages are designed to allow variations in the amount people pay in their monthly repayments. For example most flexible mortgages allow borrowers to pay more back, thus enabling you to pay of the mortgage early. Also flexible mortgages often allow scope for a payment holiday. This is when with the agreement of your lender, …
The Perpetual Mortgage becomes a reality The standard approach for a mortgage is a repayment mortgage for a fixed period of 25 years. During this time you would pay both interest and repayments to the capital amount owed. In recent years this 25 year mortgage has become increasingly difficult for people to afford. With house …
Mortgage cycling is a way home owners can use to try and pay off their mortgages early. By making extra payments and paying off your mortgage early you can save yourself many thousands of £s in interest payments. The basic principle of mortgage cycling is to have a flexible mortgage where you are able to …
These are mortgages where for a fixed time of 25 years you only pay the interest payments on the mortgages. Usually with a mortgage you pay both the interest on the loan plus an amount to reduce the capital. With an interest only mortgage it means that you need a separate plan to save money …
Repayment mortgages are the most common form of mortgage loans. A repayment mortgage means that you pay both interest payments and capital repayments. At the end of your mortgage term it means you will have paid off your mortgage debt In the beginning of your mortgage term the majority of your mortgage payments will be …
An offset mortgage is a type of mortgage where your mortgage is combined with savings in your current account. Usually it involves holding a current account and mortgage with the same financial institution. The way it works is that savings from your current account are used to reduce the value of your mortgage payments. For …
A self-certification mortgage is basically a mortgage for those who cannot prove their income. Instead of proving their income borrowers state what their income is likely to be. A mortgage is then given on this basis. However a mortgage dealer may need evidence of accounts and bank statements to back up the claims, made by …
Current Account mortgage. This type of mortgage is becoming increasingly popular. It works on the principle that your mortgage is held in the same bank account as your ordinary current account. If you have an influx of money into your current account it automatically reduces the size of your mortgage. Therefore you will be pay …
A tracker mortgage is similar to a variable mortgage. Basically a tracker mortgage means the interest rate will follow the Bank of England’s Base Rate by a certain amount. The result is that your monthly mortgage payments will go up and down, accoding to changes in the base rate. Often tracker mortgages offer a discount …
The Adverse credit market is estimated to be worth at least £25bn with the market growing all the time due to unprecendeted levels of borrowing in the UK Many people wishing to get a mortgage may have a history of bad credit. This could involve Missing credit card payments. Missing monthly mortgage payments Going overdrawn …
This is the most common type of mortgage. It means your monthly repayments will be linked to base rates set by the bank of England. Thus if interest rates go up your mortgage payments will increase. To be precise your mortgage payments will depend upon your lenders SVR (Standard Variable Rate). In practise this is …
A 100% mortgage is mortgage where you borrow the full cost of the house. Usually lenders require you a deposit of say 10% and then lend you 90% of the full cost of the house. 100% mortgages are good for those without any savings but are keen to get on the property ladder. Usually 100% …
A joint mortgage is when people group together in order to get a mortgage. This is becoming increasingly popular due to the rising house prices and the difficulty first time buyers have of getting on the property ladder. If you would like to proceed with a friend or partner there are various things to consider …