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Mortgage Types/Jargon Busting – First Thought Financial
William Gibson from First Thought Financial talks us through some typical mortgage jargon.
What is a Fixed-rate Mortgage?
A fixed-rate mortgage sets an initial interest rate for a certain length of time. You can choose two years, three years, five years, or a longer term.
You might take a two year fixed mortgage with an interest rate of 2% – and your repayments will stay constant throughout that time. Towards the end of the agreement, we would look at your financial situation to decide the next step.
What is a Variable rate Mortgage?
With a variable rate mortgage, you don’t have the same sense of security – your lender can change the interest rate at any time, which will affect your monthly repayments. One month you might pay £600, the next month you might be paying £700. Although payments can reduce, too.
How does a Tracker rate differ?
A tracker rate mortgage is similar to a variable rate because again, you’re not paying a set amount every month. This kind of mortgage tracks the Bank of England base rate.
This year the base rate has fallen to the lowest it’s ever been, which is great for
people on tracker rate mortgages. A typical product will be 1% above the base rate, so this year you will have had a mortgage rate of just 1.5%.
What is a Discounted rate Mortgage?
A discounted mortgage is where you are given a discounted rate for an initial period of say three or six months. At the end of this time, you will often move to a standard variable rate which will usually be more expensive.
What is an Offset Mortgage?
An offset mortgage is aimed at clients with a large amount of savings in the bank, which is proportionate to the property they’re buying. An offset mortgage is an agreement with your bank to offset the interest you’re earning on your savings against the interest charged for your mortgage.
It’s not a common product, currently, as it’s difficult to save such a large amount, especially with interest rates so low.
Can you explain Repayment and Interest-only Mortgages?
A capital repayment mortgage is like a traditional loan – you’re slowly paying back the money that the bank has lent you, with interest on top.
With an interest-only mortgage, you don’t repay the loan amount at all – you just pay the interest on the loan each month. At the end of the mortgage term, usually 25 years, you will still need to repay the amount that you originally borrowed.
A repayment mortgage gives you the security of knowing that if you meet all the payments you will eventually own your property outright. An interest-only mortgage will have much lower repayments, but you will still owe the full property price at the end.
What are Flexible Mortgages?
Ä flexible mortgage will allow you to make overpayments so that you can pay back the loan amount more quickly. Alternatively, you can take a break, called a mortgage holiday which can be a helpful option. If you’ve overpaid on your mortgage and then fall on hard times, you can manage your money in a way that suits you.
Most mortgages will let you overpay by around 10% of the mortgage value each year – and this can save you money, because the more you repay, the less interest is due on the total outstanding. Some very flexible mortgages will let you overpay by more than 10%.
It’s worth noting that many lenders will let you have a mortgage holiday – but it’s very important to get this agreed in advance. Don’t let the mortgage fall into arrears.
How does Cashback work on a Mortgage?
When you’re exploring mortgage deals, lenders often provide certain incentives to persuade you to choose their products. Free valuations and free legals are common examples.
Cashback is another incentive, where you get a cash payment when the mortgage goes through. But it’s important to compare all the details. Cash can seem attractive, but if you’re going to get free legal fees which could cost you £500 or £1000, this could be much more valuable to you than a £300 cashback deal.
What is Porting your Mortgage?
Porting a mortgage is where you move your mortgage to a new home. An example is where you’ve tied yourself into a mortgage. But all of a sudden a house comes up that you fall in love with – now you want to move.
Often fixed-rate mortgages involve an early repayment charge – so if you took out a new mortgage to move, you would have to pay the early repayment charge which could cost you many thousands. Whereas if you’re able to port your mortgage over to a new property, there is no breach of your agreement and you can potentially borrow more with the same lender.
What is a Guarantor Mortgage?
This type of mortgage is not used quite as much today. A guarantor mortgage is useful for someone who isn’t able to borrow the full amount they need for a property. They choose a family member or friend who can financially support them. It’s almost like taking out a joint mortgage.
If for any reason they are then unable to make the payments on that mortgage, then the person who is guaranteeing the mortgage is responsible for repaying the lender.
What is a Family Assist Mortgage?
This is almost the ‘new and improved’ version of a Guarantor Mortgage. Again, family members or friends act as a guarantor, but it’s not quite the same process. Instead, they might give you a contribution of, say 10% of the property cost.
This amount goes into a savings account with your lender. As long as the mortgage is paid on time, it stays in the account until you’re in a situation to manage the mortgage by yourself, and you release that money back to your family member or friend.
What is a Joint Borrower Sole Proprietor Mortgage?
This is similar again, but not aimed so much at First Time Buyers. It is a way of family members working together to buy a home, but only one person is named on the ownership details of the house. This protects the guarantor from having to pay stamp duty on the home.
What is the Help to Buy Equity Loan?
Help to Buy has been very popular – and the Equity Loan means you can buy a home with just a 5% deposit. The government then loans you another 20% to use as a deposit – inside London, this is 40%.
For a £100,000 home, you would need a minimum of 5% deposit – that’s £5,000. If you’re outside London, the government will give you a contribution of up to 20% or £20,000. In London, this could be £40,000 – plus your £5,000 deposit. Then you take a mortgage out for the remaining £55,000 or £75,000.
It’s a great way to get on the property ladder, and the government loan is interest free for 5 years.
How does Shared Ownership work?
With Shared Ownership you can part buy, part rent your home. You can buy a minimum of 25% of the property with a mortgage, and pay rent on the remaining 75%.
You can increase your ownership over time, in chunks of, say, 10%, until you fully own the home.
What is Right to Buy and Right to Acquire?
Right to Buy is a government scheme for council tenants where you can buy your home with a discount. The discount is based on how long you have lived in a council home. This makes it possible to buy a home that otherwise might be out of your reach – especially in London where prices are so high.
Right to Acquire is the same type of scheme but applying to Housing Association properties.
How can I decide which options are right for me?
There are so many options that it can be difficult to narrow down what will work best for you – so seek expert help. People often worry about asking questions in case they look silly, but really there are no stupid questions when it comes to mortgage products.
You can go to a bank, but they can only advise you about their own mortgages. Meanwhile, if you talk to a broker, you get access to more than 90 different lenders. We can give you personalised advice based on your unique situation.
Very often, someone who thinks they can’t get a mortgage can have one within two or three weeks. We’re here to do all the hard work for you, just get in touch.
Your home may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.