Buying a house and getting a mortgage loan is one of the biggest decisions a person will make in their life.
Even if you already have a house and are thinking about moving somewhere new, the process doesn’t become any easier. To help you make the right decision for you, we are going to break down every type of mortgage you can apply for.
For each mortgage type, we will explain what they are and who would benefit from them the most. If you want more information about the subjects we touch on today, click on the links provided.
Before we get started, we want to say a big hello to those of you joining us from instantbridgingloans.co.uk. We have recently acquired the website and are thrilled to include bridging loans to our repertoire.
In the UK we have two main payment types for you to consider. Before we can go into detail about the type of mortgage you should choose, you first need to figure out the preferred payment structure.
Your choices are repayments or interest-only. Let us explain what these mean.
A repayment mortgage is probably the easiest one to understand. In these agreements, you need to pay back the amount that you borrowed along with interest which would have been agreed upon beforehand.
By the time you have finished paying back your mortgage, you will own the property and will build equity on it too. This means you can take out another loan or mortgage on the house, giving your access to more finances.
The vast majority of mortgages fall under this category, and it is aimed at people who want to own their property at the end of their repayments.
If you are already renting, then you can more accurately assume the amount of money you can afford to pay every month for a mortgage. For example, if your rent is £1,000 and you are comfortable paying that amount, then you may wish to find a mortgage with a similar repayment price.
Knowing how much you want to pay back each month can tell you how large your mortgage can be. Other information is needed too, such as your deposit amount, income, and your credit history.To help you get started, we have guides which suggest the maximum mortgage you can afford on specific monthly repayments.
Check them out here:
When it comes to interest-only mortgages, you only pay for the interest on your mortgage. This means that your monthly payments do not go towards the large capital you have borrowed.
The idea is to pay the lender back at the end of the agreed borrowing period, instead of paying them back little by little every month. This allows you to have a much lower monthly payment.
However, at the end of your contract, you will have to pay back the lender in full or sell the property to them as payment.
Although this process is much cheaper upfront, it will end up costing you more in the long run. This is because the interest will be calculated based on the whole loan instead of the decreasing amount which you would expect from a repayment mortgage.
This type of mortgage is aimed at people who need a lower payment plan every month, but can also ensure they have the full funds when the contract comes to an end. As an example, this could include the elderly who wish to have lower bills in their waning years and plan to sell their property once they pass.
If you already have a repayment mortgage and are hoping to swap to an interest-only contract instead, know that it is possible!
There are normally three things the lender will ask for in these situations. First, you will need a solid plan which shows how you can pay back the changed mortgages. Secondly, the lender will look at the current value of your property and calculate if your current equity value matches their minimum requirements.
And lastly, the lenders will likely need at least one high income to feel secure in your new borrowing request.
In your discussions, the lender may bring up part and part mortgages. These are when you make smaller repayments instead of diving straight to an interest-only program. The monthly payments will still be lower, but you will be making small payments toward the overall loan.
As we said before, when your interest-only mortgage comes to an end, you need to pay the full amount of money borrowed.
If you cannot make this payment, then the lender has the right to claim your property instead. However, you should be aware that you can extend your term or contract with your lender. They normally only last between 5 and 25 years, but they could stretch all the way up to 40 years.
To learn how to extend your interest-only mortgage, click here.
Again, no matter which type of mortgage you end up getting, they will fall into one of two categories. This time, it will either be a fixed rate or a standard variable rate.
Depending on which version you go with, the amount of interest you pay every month will change.
You can get a fixed-rate mortgage on interest-only loans as well as repayment loans. Both will give this option.
A fixed-rate mortgage is when the interest rate is fixed for a set amount of time. These times are often for 2, 3, or 5 years. No matter what the Bank of England declares as the base rates, your rate will not change during your agreed time.
This means you can accurately know how much you need to pay every month. The number will not change, giving you a level of control.
If the rates change while you are paying for a fixed-rate mortgage you will either be protected from high rates as yours will not grow, or you will lose out on cheaper monthly payments when the rates fall.
Essentially you are opting for stability over potentially cheaper months. This type of mortgage rate is best for someone who wants to stick to a budget or can see that the rates at the time of signing their mortgage are low and want to stay on the lower deal.
SVR stands for Standard Variable Rate. Although these rates are not directly connected to the Bank of England, they are heavily influenced by them.
On a month-by-month basis, your lender will decrease or increase your payments depending on the current interest rates suggested by the Bank of England.
This can allow you to make lower payments on some months, but you also risk making higher payments on others.
When a fixed-rate mortgage comes to an end, the lender will automatically move you onto an SVR mortgage. This is considered the more expensive mortgage type, but you will not be locked into the agreement like you would be with a fixed-rate mortgage.
This type of rate is great for people who want to switch mortgage products and not be tied down to one lender for a large amount of time. If you know you want to move in the future, this mortgage rate might be the easiest option to use.
Bridging loans are a common lending agreement when buying a second property. However, they are not a type of mortgage which is why we haven’t included them in our list below. Instead, they are short-term loans that help you gain access to funds while you wait for your home to be bought.
When you buy a house or property, you will most likely join a chain. A chain is when you want to buy a property from someone who also wants to buy a property from someone else. This will continue until the last person in the chain doesn’t want to buy a property from someone currently living in their home.
This person might be selling a rental accommodation, moving to renting, buying a new build, or any other reason which would mean they don’t want to buy a home lived in by someone else.
For you to buy your next property, you need to sell your home to gain access to your equity and funds. However, the person behind you in the chain cannot buy your property until they sell their home, and so on and so forth.
To give you access to your funds and start the mortgage process off, you can use a bridging loan which gives you access to your property’s value before it has been sold.
For a more detailed example, click here.
They both have pros and cons, but an open bridge loan doesn’t have a fixed termination date which is great for the borrower and bad for the lender. This means the price is more expensive, but you don’t have to worry about the loan ending before the sale of the house.
The closed bridge loan has a fixed termination date, which is bad for the borrower but great for the lender. This means the interest rate is cheaper, but you have to close the property deal before the loan’s term time ends.
Now we will cover the 11 different types of mortgages you will need to choose from. Some you can instantly dismiss as they are not helpful to you, while others you may be beneficial. For more information on these mortgage types, click on the links provided.
A buy-to-let mortgage is when you buy a property intending to rent it out for others to use. This could be a home, a block of flats, or even a shop. Buy-to-let mortgages are almost always interest-only.
The landlord is expected to pay for the interest on a monthly basis and the income they receive from tenants is saved to pay off the mortgage at the end of the term.
When lenders look at buy-to-let mortgages, they won’t just assess how much income you receive, they will also calculate how much you can expect from tenants. This is because that income will be the most likely source of your repayment.
With the rise of apps such as Airbnb, the desire to rent out your property, even for a short amount of time, should be mentioned to your lender as it can help them understand the full picture of your income.
Buy-to-Let mortgages are great for people who are planning on becoming landlords, or are hoping to expand their financial portfolio.
A capped-rate mortgage is like a standard variable rate, but with a twist. It follows the same rating system we described before, but it also has a cap built into the contract to stop you from paying an unreasonably high-interest rate.
Very few lenders offer this type of mortgage at the moment, so getting approved for one would be a great step toward peace of mind. The reason why lenders aren’t offering this type of mortgage is due to the current instability in the financial market.
Although capped-rate mortgages sound fantastic, they do have a downside. This is known as the collar. The collar rate prevents your interest rate from falling too low. This means won’t benefit from the low rates of an SVR but you won’t be hit hard by the high rates either.
This type of mortgage is great for anyone who wants protection against high-interest rates, but still prefers the freedom of SVRs instead of the rigidly fixed interest rate option.
Discount mortgages are often a selling gimmick to get more people to sign up for loans from the lender. Just as discounts work in other areas of finances, this type of mortgage will put a discount on the interest rate but not the overall loan itself.
The discount will last for a short amount of time, but in that time you will still be saving money overall.
Discount mortgages are normally applied to SVRs. For example, if the current interest rate is 4.5%, but the lender offers you a discount of 1.5%, this will make your month’s rate 3%. As the rate changes month by month, your 1.5% discount will continue to take effect until the agreed-upon time has come and gone.
Many people swap from one discounted mortgage to another, becoming a new customer for a new lender and gaining the same new customer perks.
This type of mortgage is great for first-time buyers and people who are actively looking for cheaper rates.
Flexible mortgages shouldn’t be confused with standard variable-rate mortgages. Although you may assume they mean the same thing, this flexibility describes the way in which you pay for your loan, not the interest rate.
Normally when you agree to a mortgage, you need to pay a set amount every month, no more no less. Failing to pay can leave you with a late payment fee and paying too much can result in an overpayment fee.
The reason why lenders don’t want you to overpay is because this will reduce the number of months you have left to pay them. With fewer terms remaining, there will be less time to charge you interest. There will also be a lower value for the interest rate to be calculated. This means they will receive less profit from you.
A flexible mortgage removes these limits and allows you to pay off the loan as quickly as you like, underpay or have payment breaks.
These types of mortgages often come with a higher interest rate due to the amount of risk they present to the lender. They will also have specific details about the agreement that applies to you and your situation.
For example, if your job means you earn a lot of money in the summer but have no income in the winter, you and your bank may come up with payment breaks that match the season and your known income. This may result in higher payments on your return.
Remember that if a lender declines your mortgage offer this can affect your credit score, so try to be realistic about your goals before presenting them to a lender.
A guarantor mortgage is when you ask an additional person or a couple of people to come into your mortgage deal as you cannot afford it yourself.
A guarantor is normally a member of your family such as your parents, however, they can also be a trusted friend. This is different from buying a property with a family member or friend, as your guarantor will not own the property.
Instead, they make themselves liable to pay for the mortgage repayments if you fail to keep up with the payments.
If you have a bad credit history, no deposit, or a low income then the lender will see that you cannot afford a mortgage. Asking a family member or friend to sign the contract as your guarantor will show the lender that you have financial security in these people.
You can use our guarantor mortgage calculator to see how much you could afford with a family member helping you.
However, should you fail to make your repayments, your guarantors then become liable to make the payments instead.
Should you both fail to make the payments, the house may become repossessed and if that doesn’t the bill then your assets and your guarantor’s assets may also be looked at by the repossession team.
Depending on the agreement, this could mean that the guarantor loses their own house if you fail to pay. Because of this, the guarantor must be prepared for the consequences and responsibilities of their role.
This type of mortgage is good for people who have a strong family or friend connection who are finally stable, and who cannot afford a house by themselves.
A Help To Buy a mortgage is based on a scheme set up by the UK government. It’s designed to help first-time buyers get onto the property ladder. This help is needed as house prices continue to skyrocket while pay is at an all-time low when it comes to inflation.
This means that many people cannot afford to get a mortgage without help from an outside source.
The Help To Buy scheme has three offers to assist people onto the property ladder. The first is an ISA, the second is an equity loan, and the third is a shared ownership.
A Help To Buy ISA allows first-time buyers to open an account with a bank and deposit their savings tax-free. The government will then add to your account boosting your savings by 25%.
This program is designed to make saving faster, so you can put down a deposit for your home.
You do not have to pay this 25% back.
The Help To Buy Equity Loans are designed to make up the difference between your savings account and the deposit you need to buy a new build house. This type of loan will only be available for new builds.
You can borrow up to 20% of the property’s value and you can use this loan alongside a Help To Buy ISA. This means you just need 5% of the property’s value in savings to put a deposit down on a house.
After 25 years you need to pay off this equity loan. You can do this earlier if you wish, and realistically you should pay if off as soon as you can. This is because the value of your home will likely increase.
If the value of your home increases, the amount you have to pay back increases too. It stays at 20% until the repayment is made.
The Help To Buy Shared Ownership is when you only buy a percentage of the property’s value. It can be anywhere between 10% and 75%. The rest of the property is then owned by another person. This person will end up being your landlord.
You will have to pay rent alongside your mortgage repayments, however, as you become more financially stable you can buy more and more of the property from the landlord. This allows you to slowly increase your ownership and payments, known as “staircasing”.
The lender is normally your landlord, however, you can talk to your lender about this in more detail if you have a specific request.
These deals shouldn’t be confused with the Help To Buy Mortgage Guarantee scheme. This scheme ended in 2016 but it originally allowed first-time buyers to only leave a despite of 5%, meaning they had to pay 95% of their mortgage over the term agreed.
This put a lot of risk on the government, as they essentially became the guarantor for those using the scheme. This project became too risky in the end, which is why the scheme ended. Now, these three options are left available to first-time buyers – putting more responsibility on the buyers.
A joint mortgage is when you take out a loan with one or more people. Every person named on the mortgage becomes liable to pay the mortgage and if the group fails to make their payments everyone is responsible.
For example, if one person is making all of the payments that doesn’t mean this single person owns the house. It is owned by everyone who signed the mortgage loan.
This also means that if one person is paying their half of the mortgage bill, but the second person doesn’t, both people are responsible for the underpayment. It doesn’t matter if one person is paying consistently, you are both liable for the fees which will occur.
Joint mortgages are the most common type of mortgage, as they are usually used by couples who buy a home together. They are also used by business partners who want to invest in a property together.
When you opt for a joint mortgage, every person in the agreement can use their income and savings to reflect their ability to pay. This means you can afford a more expensive property than if you were to apply alone.
This type of mortgage is great for couples, and groups who want to own a property together.
Offset mortgages are designed to show lenders that you are not a risk. It does this by linking your savings account with your mortgage.
The lender will look at the amount of money you have in savings, and take that off the amount you own them. Your interest is then applied only to the new amount and not to the total amount you owe.
For example, if you have £50,000 in savings, and your mortgage is £150,000. You will only pay interest on £100,000.
The lender doesn’t take your savings and your mortgage is still £150,000, but your lender can see that you have the funds to pay for a portion of your mortgage. Therefore, you are less of a risk.
While your savings are being used in this manner, they won’t be receiving interest. If you attempt to withdraw these savings, it will hurt your current mortgage agreement.
When it comes to offsetting mortgages, you are often presented with two options. Either pay less every month or have a shorter term. This type of mortgage is great for people who have a lot of money in their savings.
95% mortgages are very similar to the original Help To Buy Mortgage Guarantee scheme, however, these mortgages are not backed up by the government. In these agreements, you pay just 5% deposit meaning you still have 95% left to pay.
Because there is a lot more you have to pay, and you don’t start off with a large deposit to prove your ability to pay, this type of mortgage is considered a risk. Because of this risk, the interest you have to pay will be much higher than that of other mortgages.
For some people, this balance of a low payment at the beginning and high payments every month is what they need to get on the property ladder. When you are in a stronger financial situation you can remortgage your home to find a better interest rate.
Because you started off with a 95% mortgage, your next mortgage rate won’t be great however you should be able to find a better rate overall.
This type of mortgage is good for people who don’t have a lot of money for a deposit and do not qualify for a Help To Buy scheme.
Remortgaging is when you pay for your mortgage loan with one lender by taking out a new one with another. You can also move from one deal with your current lender to another with the current lender.
Either way, you are left with a new mortgage.
If you have a fixed interest rate with your mortgage lender and the deal has come to an end, you should remortgage your home to get a new fixed interest rate. Without this additional step, you will be automatically put into a standard variable rate mortgage.
If you have debts in other areas of your financial life, you can consolidate these outstanding payments as part of your remortgaging plan. Debt consolidation mortgages help you keep your debts in one place, making them easier to manage.
Using the information above you should be able to narrow down the types of mortgages that best suit your financial situation. For more information on each type, click on the links provided. They will take you to a page dedicated to the subject.
Once you know what type of mortgage you should be looking for, start searching for lenders that will grant you these loans. Use our calculators to get an estimate of how much you can afford, so you are prepared for the lender’s suggestions.
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