Mortgage Types

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What is a Fixed-rate Mortgage? 

A fixed-rate mortgage is when you have an agreement with the lender that the amount of interest applied to your mortgage account will not change for an agreed fixed period of time. 

There are often product fees with the fixed rate. So it’s important that your broker pays attention to the applicable rates.

A lower interest rate, although generally preferable because your monthly repayments are lower, may not be appropriate for you because of the product fee charged by the lender to get access to the better rate. 

It could make your actual repayment costs over the fixed period more expensive.

How long is a Fixed-rate Mortgage?

The Fixed-rate can be for two, three, five, or ten years. Generally, the lower the fixed period the better rates you’ll have access to, and the longer the period, the higher the rate will be. 

The advantage of the shorter Fixed-rate period is you’re tied in for a shorter period of time. So if your circumstances change for the better, then you could be getting a better rate the next time or decrease the term of your whole mortgage.

You will incur an early repayment charge if you pay off your mortgage during the Fixed-rate period and the amount charged is dependent on the amount of time left on the Fixed-rate mortgage term. 

When a Fixed-rate period ends, you generally have three options. You’ll automatically be transferred to the lender’s Standard Variable-rate, which can be substantially higher than your fixed-rate and will increase your monthly repayments. 

You can also apply for a product transfer with your current lender, usually in the form of another Fixed-rate product for another Fixed-rate term. Some lenders offer better rates by charging a product fee. Others, less beneficial rates have no product fees attached.

Lastly, you can remortgage with another lender, which takes no longer as you’re applying for another mortgage either way. It will also incur conveyancing and broker costs. Remortgaging can often be financially beneficial, despite these charges.

What is a Variable-rate Mortgage?

With Variable-rate Mortgages, the lender can put the interest rate up or reduce it in line with their business interests. 

Some lenders base their interest rates on the Bank of England base rate and others use the London Interbank Offered Rate, or LIBOR rate, although the latter is usually for Buy to Let mortgages. Either way, the lender makes the decisions regarding the standard variable rate.

When the Variable-rate goes up or down, so do your repayments. The main advantage of being on a Standard Variable-rate is that there are no early repayment charges. This means if you intend on moving or paying a lump sum off your mortgage to clear the balance within a year, then it may be advisable just to stay on the Standard Variable-rate.

How does a Tracker-rate Mortgage differ?

A Tracker-rate mortgage tracks the lender’s Standard Variable-rate. So if your lender uses the Bank of England base rate, for example, then the rate will rise and fall by the same percentage points any time there is a change in the Bank of England base rate. 

If you have a Tracker-rate Mortgage of 1% above the Bank of England base rate, which is currently 0.1%, then your interest rate is 1.1%. If the Bank of England put up their rate to 0.25% then your interest rate will rise to 1.25%. 

Tracker-rate mortgages are normally available between two and five years, at which point they revert back to the Standard Variable-rate of your lender. You can get tracker rates over the lifetime of your mortgage, but these tend to be higher rates. 

With Tracker-rates, you can have collars and caps. The collar rate is an amount the rate will not fall below. 

If the collar was set at 1.1% and the Bank of England base rate fell to 0%, then the collar would prevent you from benefiting from that 1% decrease in your mortgage rate. A cap is an amount in which the rate cannot rise above. 

If the cap is set at 1.5% and the Bank of England raised their rate to 0.75% instead of paying a rate of 1.75% it’ll be capped at 1.5%, which gives you a bit of security.

What is a Discounted-rate Mortgage?

Discounted-rate Mortgages are similar to Variable-rate Mortgages in that as much as the rate can go up or down, but usually, Discounted-rate Mortgages come in options of two, three, or five years. You can also find lifetime discounted rates from some lenders. 

The lender will provide you with a Discounted-rate Mortgage based on their Standard Variable-rate, rather than the Bank of England base rate, which means it can fluctuate based on the business interest of the lender.

If you have a Discounted-rate of 2% on the lender’s Standard Variable-rate, of for example 4%, then your interest rate would be 2%. If your lender then decided to increase their Standard Variable-rate to 5% your interest rate will rise to 3%. 

Alternatively, if they reduce it to 3%, your rate would go down to 1%.

What is an Offset Mortgage?

An Offset Mortgage is more complicated. With an offset mortgage, you have a savings account linked to your mortgage account and these savings will be offset against the mortgage interest. 

You have the freedom to spend your savings, but this will reduce the level of savings you make, meaning your repayments will be higher, whereas if you add to your savings, it reduces your mortgage payments.

Some of the advantages are that you can, either use the interest savings to make higher repayments towards your mortgage and clear the balance earlier or you can choose to pay less each month, making it easier for you to budget. 

Offset Mortgages are advantageous to a higher rate or additional rate taxpayers because you’re no longer paying interest on your savings.

Often you’ll be allowed to make overpayments on an Offset Mortgage, but some lenders may have early repayment charges if you choose to do so. 

What is the difference between Capital Repayment Mortgages and Interest-only Mortgages? 

The main differences are that with Capital Repayment, the loan will be repaid over the term of your mortgage as well as the interest. The shorter the term of the mortgage, the less interest you pay, and the mortgage debt will be totally clear by the end of your mortgage term.

With Interest-only, you will have lower monthly repayments, but that’s because you’re only paying the interest charged. At the end of the mortgage term, you will still have to pay back the entire loan that you borrowed. This is more common with Buy to Let Mortgages, but you will have to provide an acceptable repayment strategy to the lender, for example, the sale of the rental property.

What is a Flexible Mortgage? 

This is the term used for a mortgage product that provides the borrower with additional features, such as being able to make overpayments, underpayments, take payment holidays, porting, and with some tracker mortgages, drop, lock or switch and fix. 

They are basically normal mortgages with additional features that may benefit you.

Does a Cash-back Mortgage come under the banner of a Flexible Mortgage?

Cash-back is a feature of a Flexible Mortgage, but generally, it’s at the start of the mortgage. It’s used as an incentive from lenders to get you to choose them over the competition. When considering your cashback offer, you should consider whether it’s the best option. 

A good broker will calculate that, taking into consideration your financial situation before advising you on it.

How do Overpayments work?

This option will help you to reduce your balance quicker, so you are mortgage-free earlier and as a result, reduces the interest you pay over the term. 

Some mortgage products will allow you to overpay, but there will be a limit (usually up to 10%) on the amount you can overpay each year, either as a lump sum or as regular payments. 

It depends on your financial situation when you take out the mortgage, whether being able to clear your mortgage without penalties is important to you. You should speak to your adviser if you plan on using the facility to ensure you don’t inadvertently cost yourself money with early repayment fees.

What is a Guarantor Mortgage?

A Guarantor Mortgage is where a parent or close family member makes a commitment to pay all or some of the liability if the borrower should default or miss a payment on their mortgage. 

The guarantor offers capital, which could be savings or their own property, as security against the mortgage. If the property is repossessed and if the lender is unable to recoup the full amount borrowed, then the guarantor will also be liable for that difference. If no payments are missed, then there’s no risk to the guarantor.

Guarantor Mortgages are used to assist the purchaser when they don’t qualify for a mortgage. For example, if they have a low income, no deposit, a bad credit score or they have little or no credit history. 

There is a risk to the guarantor and they will be advised to get some free legal advice for their own benefit to make sure that they’re fully aware of their commitment. These are less common in today’s market, but they are still available from some lenders.

Is a Family-Assist Mortgage the same?

Family-Assist Mortgages allow family members to provide security to buy a property that might otherwise be out of reach for the applicant. 

The way they work is by using a deposit or a percentage of the family’s property as security against the mortgage. It’s similar in many ways to a Guarantor Mortgage, however, it’s for a set period, typically between three and five years. This security allows the borrower to borrow up to 100% Loan to Value on the property, depending on the lender.

At the end of this period, the security is released, so it’s assumed that the borrower will be in a financial position to fulfill the mortgage criteria on their own, at this time.

How does the Help to Buy Equity Scheme help First Time Buyers?

The Help to Buy Equity Scheme is a government scheme intended to help First Time Buyers purchase a new property. 

You can borrow a minimum of 5% and up to 20% in England except for London, where you can get up to 40%. There are regional differences within the scheme, so it’s always good to check. 

The Northeast has a maximum property value being £186,000 and those living in London have access to properties up to a maximum value of £600,000. In order to qualify, your home builder will need to be registered for the Help to Buy Equity Loan. 

You can pay the loan in full or part at any time, but if in part, it must be a minimum of 10% of the property’s value, at the time you pay it back. If your property price rises, so do the amount of the equity loan you owe, but similarly, if the price of your home decreases in value, so does the amount you pay back as well.

One of the good things about this scheme is that there’s no interest during the first five years of the Equity Loan. In year six, however, you’re charged interest along with a monthly arrangement fee. When you agree to take out the Equity Loan, you agree to pay all management fees interest and pay it back in full.

How does the Shared Ownership Scheme help people get onto the property ladder?

This scheme allows you to buy part of the property and rent out the other part, so if you want to buy, but can’t afford a mortgage to cover the full cost of the property, then you can get a mortgage with shared ownership. You can choose to own between 25 and 90% of the property. 

The other share of the property will be owned by the Housing Association or approved Shared Ownership Scheme and you can buy back the other shares in increments of five percent, as and when you can afford to and depending on where you live and the specific scheme’s criteria. 

The percentages that you can borrow from will vary from lender to lender. Typically, when you buy back the other percentage shares, it will be based on the current price of the property at the time you purchase it back.

What is Right to Buy and Right to Acquire Schemes and how do they differ?

The Right to Buy Scheme is really still only available in England. You must be living in a council or housing association, for at least three years in total, although not necessarily consecutively. You get a discount on the price of the property, depending on the length of time you lived there. 

In Northern Ireland, some properties cannot be bought due to limited stock and you also have to be a resident in Northern Ireland for five years or more to qualify. Additionally, the discount will be a maximum of £24,000, no matter how long you’ve lived in the property.

The Right to Acquire Scheme, which is mainly for housing association tenants, is similar to the Right to Buy Scheme, but generally for housing associations only. Discounts on the purchase price can be between £9,000 and £16,000 nine to sixteen thousand pounds and to qualify, you must live in a self-contained housing association home. 

It also has to be your main home and the property has to be a former council home that transferred to a housing association home after March 1997 or built/bought by the housing association after March 1997. 

There are regional variations and those in Wales and Scotland no longer have the Right to Buy.

How to Contact You 1st Mortgages

For further advice about any of the above or any other mortgage-related query, contact You 1st Mortgages via our website or call us freephone on 0333 224 9052. We won’t charge you for the advice we give until we actually secure your mortgage offer and we’re always glad to help anybody that needs us