Mortgage Types Jargon Busting
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Mark from Fancy a Mortgage joins the Mortgage & Protection podcast to break down and explain the different types of mortgage.
What is a Fixed-rate Mortgage?
With a fixed-rate mortgage, for an initial period of two, three or five years the interest rate is fixed, which means that your monthly mortgage payment will always stay the same.
What about a Variable rate Mortgage?
Variable rate means that the interest that you’re paying on your loan will go up or down depending on the lender’s particular rate.
At the end of a fixed-rate deal, you’ll move to your lender’s standard variable rate, which is usually quite an expensive way to borrow, but is a bit more flexible. Or, you also have the option of going into another fixed-rate deal.
How does a Tracker Mortgage work?
A tracker is a form of variable rate mortgage. Again, it will go up and down with interest rates, but it tracks a certain base rate. They often sit at a percentage or two above the Bank of England base rate or the lender’s own rate.
What is a Discounted rate Mortgage?
Discounted rate was brought in largely for First Time Buyers, and many lenders prefer to use this in place of a fixed-rate. It gives a discount on the lender’s variable rate for a period of generally two or three years, giving you lower monthly payments. It’s an incentive to choose a certain lender.
What is an Offset Mortgage?
With an offset rate you have a bank account as well as a mortgage from the same lender. You use the bank account to pay your mortgage, credit cards and other bills, and the amount of money left in the account is offset against your mortgage balance. If you keep a good balance in the account you can reduce your mortgage debt more quickly.
What’s the difference between Capital Repayment and Interest-Only Mortgages?
With a capital repayment, which is the normal type of mortgage, every time you make a monthly payment on your mortgage, you’re reducing the overall loan amount that you originally borrowed, with interest on top.
With interest-only you only cover the interest – so the payments are less, but you’re not reducing the loan amount. So you have to work out another way to bring down the balance.
These can prove difficult – especially where people have an endowment or savings policy that they originally put aside, but then use them for other reasons. At the end of the term, they are unable to pay off their mortgage. So it’s important to seek the advice of a broker on which mortgage type will suit you best.
What is a Flexible Mortgage?
A flexible mortgage gives you more features. It can be fixed or variable, and generally allows you freedom to increase or decrease your monthly payments.
If you’ve overpaid for a few months you might choose to take a payment holiday – you can sometimes even draw money back out of the mortgage. You generally pay more in interest rates for this flexibility, and each lender will have different flexible products on offer. Again, a broker can help you identify what exactly you need.
Porting is also an option with a flexible mortgage – it means that even on a fixed deal you could take your current mortgage to a new property.
What is a Guarantor Mortgage?
A guarantor mortgage can help you get on the property ladder when normally you wouldn’t meet the lender’s criteria. It may be that you are in an apprenticeship or training scheme, and a family member or a close friend agrees to ‘guarantee’ to the lender that you will pay your mortgage.
Some lenders will take equity in a family member’s property as security, or access to a cash amount if needed. They’ll keep that security for five years or longer, until they are satisfied that you can afford the mortgage on your own.
What is a Family Assist Mortgage?
Again, this type of mortgage lets family members assist you in buying a home. You can have up to four people on the mortgage application. Some lenders ask the family members to put down savings of a certain amount, for example £30,000, for a period of three to five years.
Once the person can afford the mortgage on their own income, the lender returns those savings. But there are many different ways this can work, so seek advice.
What is the Help to Buy Equity Loan scheme?
This scheme is now only available for First Time Buyers, and enables you to buy a new build home with as little as 5% deposit. Outside of London the Government then loans you up to 20% to add to your deposit, enabling more people to get on the property ladder.
For the first five years, there’s nothing to pay on the government loan. In London you can get 40% help towards your deposit and again, you only have to put 5% down.
There’s information on the government website and a broker can guide you through the process and check affordability.
What is the Mortgage Guarantee Scheme?
This is another government scheme to help lenders bring back 90% and 95% mortgages. The guarantee gives the lenders more confidence to lend to First Time Buyers and home movers with a 5-10% deposit. It means that it should be easier to get a mortgage, and rates could drop a little bit.
What is Shared Ownership?
Shared Ownership is again a good scheme and we’ve helped many people buy a home with it. Imagine that you wanted to buy a property at £200,000 but you haven’t got a big enough deposit. With Shared Ownership you can buy a part share of the home through a housing association.
You can apply to buy a percentage of the home and pay rent on the rest. So you might get a mortgage for 50% of the value, or £100,000. In the future, you can ‘staircase’, which means you can increase the percentage you own over time.
In the end, you can end up owning the whole of the property. Some lenders will consider a 100% mortgage on this scheme so there’s no deposit for you to find.
What is Right to Buy and Right to Acquire?
If you have an assured tenancy with the council or a housing association you have the right to buy the property with a discount. The size of the discount depends on how long you have been a tenant and where you live in the country, but they can be very generous. Because of the discount, often no deposit is required.
The Right to Acquire is available from housing associations that don’t offer the Right to Buy. Again there is a discount, but it’s generally a lot smaller than with Right to Buy – the maximum is around £16,000 in London.
What does it cost to use a Mortgage Broker?
There’s no cost for an initial conversation, where we explore your situation and give you advice and recommendations. We only charge a fee when you decide to take out a mortgage through us. We will clearly explain the costs at this point, and the fee is payable once your house purchase has completed.
Some brokers require a small upfront cost and you’ll need to check whether this applies before you agree to anything. But at Fancy a Mortgage there’s no upfront fee, so give us a call or drop us an email and we’ll help you start your mortgage journey.