Whether you are a first-time buyer, moving home or just remortgaging, there is a vast range of deals available from the hundreds of lenders in the UK.
Taking out a mortgage is a massive financial commitment that none of us can afford to get wrong.
What is a mortgage?
A mortgage is a loan taken out to buy property or land. Most run for 25 years but the term can be shorter or longer. The loan is ‘secured’ against the value of your home until it’s paid off. If you can’t keep up your repayments the lender can repossess your home and sell it so they get their money back.
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!
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, usually before your 70th birthday. For most borrowers (and lenders) this is the preferred route.
Types of mortgage
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.
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.
Fixed rate mortgage – 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. The 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, 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 – 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. 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.
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.
Capped – 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 – 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. 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. 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.
Types 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.
Home-owner – a person who owns his/her own home either with or without a mortgage.
Remortgager – 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 – 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.
How much can you borrow?
This will depend on how much you can put down as a deposit, how much you earn and how much you can afford to repay each month. All lenders have different lending policies and it is important to be able to match borrowers with the right lender and the right mortgage.
Loan to value
With the assistance of Government schemes such at the NewBuy Deal, it is currently possible to borrow up to 95% of the value of a property. Unassisted, most lenders will go up to 90% LTV.
Since April 2014, new regulations require lenders to assess borrowers on their ability to repay the loan now and in the future. In some cases, this has made it harder for people to get a mortgage and whilst this is frustrating, the rules are there to protect the borrower.
How do lenders assess affordability?
Assessing affordability is often referred to as stress-testing. Lenders will ask for comprehensive details of your income and expenditure. Essentially they deduct a base line of costs, typically your regular monthly bills and then apportion an amount of what’s left to the monthly mortgage payment. They will also stress test your ability to pay the mortgage if rates go up. In order to do this many apply a notional rate of 5-7%.
So if you are thinking about getting a mortgage, it’s worthwhile looking at your monthly outgoings.
You credit profile also plays an important role in getting a mortgage. Most mainstream mortgage lenders like to lend to borrowers with good, clean profiles, so it’s always worth checking yours to ensure that is as clean as possible. You can request a copy of your profile from a number of agencies including Equifax and Experian. That’s not to say you can’t get a mortgage if you have adverse credit but it’s likely that you will be offered a higher rate.
To discuss your requirements, please contact our specialists or call us on +44 (0)203 490 41 21.