Mortgage Types/Jargon Busting
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In this latest podcast, Duncan Hodgson from Purely Financial Planning explains different mortgage types, features, and schemes. Here’s a summary of the discussion, but for more detail, click on the podcast link above.
What is a Fixed-rate Mortgage?
Fixed-rate is the most popular mortgage type, where the rate of interest for your loan doesn’t change for a set period of time. When you hear lenders talk about a ‘two year fixed’, it simply means that the interest rate won’t change for two years. So your monthly payment will stay the same for that period of time.
What is a Variable-rate Mortgage?
This is the opposite of a fixed-rate. A variable-rate broadly tracks the Bank of England base rate. So if interest rates increase in the UK, the bank also increases its rates. Someone on a variable-rate mortgage would then see their monthly payment go up.How does a Tracker-rate differ from a Variable-rate Mortgage?
A tracker-rate will track the Bank of England base rate, so your mortgage rates only change as the Bank of England base rate goes up or down. A lender can’t choose to raise the rate of a tracker mortgage, so there is a greater degree of control. With a variable-rate, the lender decides when to change the interest rate – which may be linked to the base rate, or may not.
What is a Discounted-rate Mortgage?
Discounted rates are rarer these days. These products offer a discount on the lender’s standard variable-rate. So you might pay 0.5% less than the standard rate, for example. Your payments could go up or down depending on the variable-rate set by the lender.
What is an Offset Mortgage?
An offset is slightly different as it links your accounts together. If you have a good amount of savings in a bank, you can take out a mortgage with the same lender and they will ‘offset’ your borrowing against your savings account, which means you can get better interest rates.
You can get both fixed-rate and variable offset mortgages.
What are the different Repayment Types?
There are two different repayment types; ‘capital repayment’ (sometimes just called repayment) and ‘interest-only’. The big difference is that capital repayment will reduce the overall debt as the months roll on. At the end, you owe nothing at all and you own your home outright.
With interest-only, you’re only paying the interest. So at the end of the 25 or 30-year mortgage term, you still owe the amount that you originally borrowed. The advantage is that the monthly payments are much lower.
But it is extremely important that you put something in place to repay the debt at the end of the term, and that’s where good planning and advice comes in. You can also switch from one mortgage type to the other by remortgaging.
What is a Flexible Mortgage and how can it help?
Flexibility generally pertains to penalties – usually for early repayment. If you were buying a property to renovate and sell quickly, you will want the flexibility to pay that mortgage off early, with no penalty charges.
So depending on your plans, flexibility can be extremely important. It means you can pay in large sums or pay off the mortgage entirely, without additional cost.
How does Mortgage Cashback work?
Cashback is usually an add-on feature – an incentive for you to choose a certain product. You receive a payment on mortgage completion, which can be anything from £250 up to around £1,000. Cashback is often described as a contribution towards the costs of a mortgage, such as the legal work.
What about Overpayment?
Overpaying is a good way of reducing the debt and can help you pay off your mortgage more quickly. Most lenders now offer an overpayment facility, and it’s generally expressed as a percentage of the loan. A lender might allow you to overpay by 10% of the loan per year. So if you borrow £100,000, you can pay an extra £10,000 off per year.
This facility can be particularly useful if you earn a bonus or receive extra income from other sources.
Can I take Payment Breaks on my Mortgage?
With many lenders, as long as you have been a regular and reliable payer to date, you can ask to take a few months off. There will be certain conditions, but this can be of great benefit – as we saw with the impact of Covid-19 when many people took a mortgage break.
The most important thing is to speak to your lender and make sure this is arranged and approved.
What is Porting your Mortgage?
Porting is essentially moving your mortgage from one property to another. It’s particularly useful if you’re in a fixed-rate period – in the past, you would have to pay a penalty for ending the mortgage early. Now, many lenders will let you move your mortgage across to the new house.
But importantly, you must reapply for your mortgage as part of porting. Just because you have a mortgage doesn’t mean that your lender will automatically approve you. We would advise anyone to seek independent advice if they’re thinking of porting, to compare all the options.
What is a Guarantor Mortgage?
Guarantor mortgages have evolved over the years. Traditionally, a young person or First Time Buyer that couldn’t quite fit all the mortgage credentials could have a parent stand as guarantor. The idea was that if the son or daughter can’t pay the mortgage, the parent steps in to cover it.
These pure guarantor schemes are a thing of the past. Lenders have now built them into ‘Family Assistance’ mortgages. One example is where a family member lodges a deposit with the bank as an extra piece of security, which they can reclaim at some point in the future.
What is the Help to Buy Equity Loan?
The Equity Loan is a government scheme that enables you to borrow for a 20% deposit. You will need a 5% deposit yourself, to buy a new build property. You’re loaned the additional deposit amount and it’s interest free for the first five years.
There are pros and cons to every mortgage and scheme, so do seek professional advice to make sure you have compared all the options. Let Purely Financial make your property purchase faster and easier.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.