So. Much. Jargon.
Moving house is stressful enough without all needing a degree in property terminology, which is why we believe it’s our job, as estate agents, to help break it all down for you. This week, we start at the beginning of the process with mortgages.
When buying a home, be that for the first time or through moving home, a huge percentage of people require a mortgage to help fund their purchase; and despite all serving the same purpose (i.e. lending you money to buy property at a given rate of interest that you’ll need to pay back over time) there are many different types of mortgage available.
Please note: This article is not intended to give advice. If you require advice on which mortgage type is the right one for you, you should speak to a qualified mortgage adviser. The Sims Williams team can recommend an adviser to you with no obligation. Your home may be repossessed if you do not keep up repayments on your mortgage.
So, what are the different types of mortgage and how do they work?
The most common mortgage type, repayment mortgages are the base for the vast majority of other mortgages on the market, regardless of their fancy marketing names and terms.
How it works: you receive a loan from a lender and pay it back over a period of time. Each month’s payment will repay part of the sum of money (capital) borrowed and part of the interest attached to the loan. Once the designated period has elapsed, your loan will be paid in full and the property will be yours.
Interest Only Mortgage
Interest-only mortgages operate in an entirely different way to repayment mortgages.
How it works: Interest-only loans work on the basis of merely paying back the interest on the mortgage each month, not the capital. This sounds great when you find out just how little you’ll have to pay every month, but you’ll still be liable for the capital borrowed when the term comes to an end. What this means is that you need to be 100% certain you’ll have the original capital ready to clear the mortgage once your loan period elapses, otherwise you could be forced to sell your home.
The fixed-rate mortgage is likely the most popular choice, particularly with first-time buyers.
How it works: The interest rate will be fixed for a certain period of time. This timeframe can vary from two years at the lower end, all the way up to 10 years in some instances.
Variable Rate Mortgage
Lenders have a standard variable rate which they base all of their other products around, and it’s this rate of interest that your fixed rate mortgage will revert to once the fixed period comes to an end. In short, this will be the lender’s basic mortgage.
How it works: The ‘variable’ aspect applies to the interest rate charged on the money you borrow, and that can go up as well as down. Variable rate mortgages are loosely hinged around the Bank of England’s base rate, but they’re also subject to the lender’s own criteria, too. This means that your rate could increase even if the Bank of England’s rate remains the same.
Tracker mortgages follow a designated interest rate by a set amount, either above or below the chosen rate of interest.
How it works: The rate these mortgages usually follow is the Bank of England’s base rate, which means that if the Bank of England decides to put up interest rates, your mortgage repayments will follow suit (and vice versa should they decide to drop them).
Capped Rate Mortgage
A very rare mortgage product, capped rate loans mean exactly that: your interest rate will never rise above the stipulated amount given when you take out the mortgage, but you could still benefit should they go down.
High Percentile Mortgage
More commonly known as 95% or 100% mortgages, high percentile loans are offered for those who are unable to raise a sufficient deposit to buy a property. These have been few and far to come by since the 2008 crash, but they are starting to creep back into the market once again.
Discount Rate Mortgage
Discount rate mortgages are offered below the lender’s standard variable rate by a certain amount.
How it works: These are great if the standard variable rate is stable, but when there’s unpredictability in the lending market they can prove to be a rollercoaster ride as rates can go up as well as down.
Ideal for those who have a decent amount of savings and who fall into the highest tax rate band, offset mortgages operate in a unique fashion that combines both your mortgage and your savings together.
How it works: With an offset mortgage, you’ll only pay interest on the difference between your mortgage and your savings. So, for example, someone with a £300,000 mortgage and £25,000 in savings will only pay interest on £275,000. This is calculated month by month.
Flexible mortgages are often taken out by those who are unsure of a steady income month to month, such as those who are self-employed, for example.
How it works: As the name suggests, flexible, or flexi, mortgages allow you to pay more or less each month, with some even allowing you to miss payments altogether some months if circumstances become exceptionally tricky; however, flexible mortgages are generally offered at an increased rate of interest by lenders.
You’re likely familiar with cashback on credit or bank cards. Cashback mortgages work in the same way: you’ll get a designated amount back on the loan, usually a percentage, when you choose that particular product over another.
Buy-to-let mortgages exist for those who are looking to purchase property with the aim of renting that home out rather than living in it themselves. The calculations involved in a buy-to-let mortgage will differ from other mortgage types as the lender will generally consider the amount of rent the property is likely to achieve when deciding how much they are willing to lend.
First Time Buyer Mortgage
First-time buyers are free to choose any mortgage type, with the exception of buy-to-let, but some lenders may offer deals exclusively to those looking to get on the property ladder for the first time.
These mortgages will often be tied in with government schemes like Help to Buy.
OK, so there’s still a lot of jargon here…read and save our mortgage jargon buster to help you digest what you’ve just read.