Mortgage

There are and always have been many different types of mortgage, many are only available during certain economic times, but others tend to be more universal. Because of the variety of mortgages available from many lenders it is sensible to seek professional advice from a Mortgage Broker to avoid finding yourself saddled with a mortgage that may be more expensive than needed or result in high costs or penalties.

Julie Twist Properties have an in-house Mortgage Adviser please ask to be introduced

Standard variable rate mortgage

A lender’s standard variable rate (SVR) is variable and liable to fluctuate as general market rates go up and down, it is not the same as the Bank of England base rate (BoEBR)  . An increase in the BoEBR usually leads to lenders increasing their own standard variable rate. If the BoEBR is reduced, borrowers with an SVR

mortgage will see their repayments fall, although there is no guarantee that the lender will react

to a change in the base rate immediately. The BoEBR is set each month.

Fixed rate mortgage

With a fixed rate mortgage, the interest rate is fixed at a specific rate for a set period,

typically from six months to five years, although it is possible to fix the rate for longer.

Fixed rates are ideal for those borrowers looking to budget as the monthly repayments are fixed for the period.

If interest rates rise during the fixed period then the borrower benefits from no rise in their own repayments, the opposite is also true – if interest rates fall then the borrower’s will not benefit from a reduction in their own repayments.

There are usually penalties for getting out of a fixed rate mortgage during the fixed rate period (and sometimes beyond) which are often prohibitive.

There are usually arrangement fees for setting up a fixed rate mortgage and these can be from as little as a few hundred pounds to a few thousand, the typical amount is around £1,000.•

At the end of the fixed rate period, the mortgage will usually revert to the lender’s SVR, which could mean a sudden increase in repayments if interest rates have risen sharply during the period.

Capped rate mortgage (including cap and collar)

This is a variable mortgage with a cap that stops interest rates going above a certain point. The cap is usually for a fixed term and therefore a borrower has the benefit of knowing that their repayments will not rise above a certain amount during that period.

There is usually an arrangement fee and early exit penalties similar to fixed rate mortgages.

Some capped rate products come with a ‘collar’, this is a minimum interest rate that will

be charged, even if the lender’s SVR falls below this rate. In effect, the lender sets an upper

and a lower limit to the interest rate payable by the borrower.

A capped rate mortgage product is suitable for those who expect interest rates to rise and want

the security of knowing the maximum they will be charged each month, while at the same time

benefitting from interest rate reductions.

Discounted rate mortgage

A discounted rate mortgage is a variable rate product with a genuine discount off the lender’s SVR

for a specified period of time. For example, the lender may offer a 1% discount for three years or

a 1.5% discount for 18 months.

The mortgage repayments fluctuate in line with the lender’s SVR less the discount, consequently for borrowers on a strict budget these may not be the ideal solution.

There is usually an arrangement fee and early exit penalties similar to fixed rate mortgages.

Tracker mortgage

Tracker mortgages are those where the interest rate ‘tracks’ another rate, such as the BoEBR

or the LIBOR (the rate at which banks and other financial institutions lend to each other on the

wholesale market).

During the ‘tracker’ period, the borrower’s mortgage rate will be a fixed percentage above or

below the rate to which it is linked. For example, a base-rate tracker mortgage might be set at

1.5% above BoEBR, in which case every time the Bank of England Monetary Policy Committee

announces a change in the BoEBR, the borrower’s interest rate will change immediately. However,

it is likely that the lender will impose a ‘collar’ a minimum rate that the borrower will pay.

Unlike mortgages charged at, or linked to, the lender’s SVR, there is a guarantee with tracker

mortgages that the interest rate charged will change immediately there is an increase or

reduction in the rate it is tracking.

As with other special rate products there may be an arrangement fee to pay as well as early

repayment charges imposed for full or partial redemptions, and borrowers may be required to

buy certain associated insurance products.

Buy-to-Let Mortgages

Where an individual wishes to purchase a property to let to tenants and make a profit then they would require one of these. Most lenders will only lend where the rental income will at least meet the monthly repayments, they also usually require the borrower to be a home owner and have a minimum level of income eg £25,000pa.

Other types of Mortgages

There are many other types of mortgage that are less common and often only suitable for more experienced borrowers or those with specific requirements.

LIBOR (London Interbank Offered Rate)

Mortgage linked to the rates of interest that banks lend to each other at

EURIBOR Euro Inter Bank Offered Rate

Most European tracker mortgages are linked to this, it is the equivalent of the Bank of England base rate

Cashback mortgage

This is where the lender makes a lump sum cash payment to the borrower on completion of the

mortgage to spend as they wish. The cash is repayable as part of any early exit penalties.

Low-start mortgage

A low-start mortgage is arranged on a capital and interest basis but, for an initial period

typically three years only interest is payable, thus reducing the monthly outgoing for the

borrower. At the end of the low-start period, the mortgage repayments are recalculated so that

the mortgage is repaid over the remaining 22 years. This type of mortgage is useful for those

who expect a significant and predictable increase in their income, such as someone on an upward

career path.

Deferred-interest mortgage

With a deferred-interest mortgage a lower interest rate is charged in the first few years, but the

‘discount’ in this case has to be repaid, unlike a discounted rate mortgage. At the end of the

deferred period the underpayment is capitalised, increasing the debt.

Flexible mortgage

A flexible mortgage is one that allows the borrower to make overpayments and underpayments

without penalty within certain parameters and in certain circumstances there is the option

to take a payment holiday.

Some flexible mortgage have a drawdown facility where the borrower can overpay and then draw out the overpayment if they need additional funds.

Offset mortgage

An offset mortgage is where some or all of the borrower’s savings are held in a linked account

and, instead of earning interest, the savings are used to offset against the mortgage balance,

meaning that interest is charged on the reduced balance.

Offset mortgages are particularly advantageous to higher-rate and additional-rate taxpayers’.

Current account mortgage

Similar to an offset mortgage, a current account mortgage offers the facility to receive salary

credits, pay direct debits and offset savings balances, as all of the borrower’s personal financial

transactions are carried out within one account.

Hybrid arrangements

A hybrid mortgage combines two different interest rate options, allowing the borrower to take

advantage of, say, the security and peace of mind offered by a fixed rate, while benefitting

from interest rate reductions that apply to SVR mortgages. The mortgage is divided in half or

whatever proportions the lender may specify and other combinations might include:

  • Fixed rate/discounted rate.
  • Fixed rate/tracker.
  • Fixed rate/capped rate.
  • Capped rate/tracker.

It is likely that early repayment charges will apply, although different criteria will apply to each portion of the mortgage, whatever they may be.

What can I afford ?

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. Our initial mortgage consultation is free. We will charge a fee of £395 on application for finding the best deal. making the application and managing it through to a formal offer.



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