When you’re ready to buy a property, it’s an exciting time and you will want to secure the best mortgage deal available. With so many options available, though, it’s hard to know where to start. Before you can make a decision, you need to understand the different types of mortgages available and which one is better suited to your circumstances.
At Trinity Finance, we make choosing a mortgage uncomplicated by explaining the differences to you in a straightforward, jargon-free way. Our experienced mortgage brokers are on hand to assess your situation and help guide you on the best mortgage type to suit your circumstances and needs.
What is a mortgage?
A mortgage is a loan from a lender that enables you to purchase a property. This loan is repaid over an agreed term, such as 25 years, along with interest. The amount you repay each month is determined by how much you borrow, the length of the mortgage term, the interest rate payable and whether you have opted for a repayment or interest-only mortgage.
Until you have repaid the mortgage in full, you won’t own your property outright and the lender will consider it to be collateral. This means that if you fail to keep up with your mortgage repayments, the lender has the right to repossess your property. Therefore, it’s essential to choose the right type of mortgage to ensure this doesn’t happen.
Our professional mortgage brokers, located throughout Kent, London and Edinburgh, are available to explain the different mortgage types to you and help you narrow down the choices until you find the best one for your situation. Choosing the right type can potentially save you thousands of pounds over your mortgage term so it’s important to make the correct decision. Once you have, we can search for the best mortgage deals with competitive rates for you. Call us on 01322 907 000 to speak with a mortgage consultant today or send us an enquiry via our contact form and we will reply to you as quickly as possible.
Repayment versus interest-only mortgages
You need to decide whether you prefer a repayment or an interest-only mortgage. In some cases, a combination of these may be available.
Also called a capital and interest mortgage, this is when you make monthly payments to repay part of the loan amount (the capital) as well as some of the interest you owe. A repayment mortgage is the most popular choice because you will have completely repaid the loan at the end of the mortgage term, such as 25 years.
With this type of mortgage, you only pay the interest due each month. As you don’t pay off any of the capital during the mortgage term, the entire amount borrowed has to be repaid when this term comes to an end. When making your mortgage application, you will need to provide your lender with proof that you can do this, such as a savings plan.
An interest-only mortgage can be appealing because your monthly payments are a lot lower than with a repayment mortgage. However, you do have to repay the original loan at the end of your mortgage term.
Should you choose a fixed rate or variable rate mortgage?
Choosing which is best for you between a fixed rate and a variable rate mortgage depends on different factors. If you prefer to limit your risk and want to know exactly how much you’re paying each month, a fixed rate mortgage is better for you. If you think that interest rates may fall in the future but can also cover higher interest rates if they suddenly increase, then a variable rate mortgage may be more suitable.
Fixed rate mortgage
A fixed rate mortgage allows you to pay a set interest rate for an agreed period at the start of your mortgage, such as 2, 3 or 5 years. This is helpful for budgeting purposes as you know exactly what you have to pay each month. You also have peace of mind that your payments won’t increase if the Bank of England increases the interest rate. The downside to having a fixed rate is that you don’t benefit from lower payments if the interest rate drops. Fixed rate mortgages also tend to have higher rates of interest than variable rate mortgages.
Once the fixed term ends, the interest rate will revert to your lender’s standard variable rate (SVR). The SVR is usually higher so it’s recommended to look for a new mortgage deal a few months before the fixed rate period ends to avoid having to pay a higher amount. Bear in mind that you may be liable for early repayment charges if you switch to a new deal.
Variable rate mortgage
With this type of mortgage, the monthly interest payments you have to make can increase or decrease during your mortgage term. It’s not recommended to opt for the lender’s standard variable rate, which is set and adjusted by each lender. This rate is usually high compared with other rates. If you do have a mortgage with the lender’s SVR, though, and decide to remortgage or find a new home, you won’t have to pay any early repayment charges. There are several other types of variable rate mortgages, the main ones being discounted rate, tracker and capped rate mortgages.
Discounted rate mortgage
As a way to encourage you to choose a mortgage with their standard variable rate, lenders offer a discounted rate for a set term, which is usually between 2 and 5 years. Once this period has ended, the rate switches to the SVR, which is much higher. Although a discounted rate mortgage can initially seem attractive because of the low rate and cheaper monthly repayments, the rate is linked to the lender’s SVR. This means your payments can still increase if the lender decides to increase their SVR.
Tracker mortgages track a particular interest rate, which is usually the base rate set by the Bank of England, and you pay a fixed percentage on top of that rate. As the base rate increases or decreases, so do your payments. Some lenders set a collar rate, which is a minimum rate that your interest rate cannot fall below. There isn’t usually a limit to how high the rate can go, though. You can choose to have the tracker rate for an introductory period, such as 2 to 5 years, and then pay the lender’s SVR. Alternatively, you can opt to have the tracker rate for the entire mortgage term.
Capped rate mortgage
The rate can increase and decrease for this type of mortgage in the same way as the other variable rate mortgages. The difference is that a cap is set so that the rate you pay cannot go higher than this. This means you benefit from lower payments when the rate drops but have peace of mind that your payments won’t exceed a certain amount when the interest rate increases. As having a capped rate provides you with more security, the interest rate is generally higher than a discounted rate or tracker mortgage.
An offset mortgage
Depending on the deal you choose with an offset mortgage, you can have either a fixed or variable interest rate. This type of mortgage is linked to your savings account. The balance of your savings is offset against your mortgage amount, which reduces the amount of interest you have to pay. You won’t earn any interest on your savings but they are taken into account when calculating the interest payable. For example, if you have a mortgage of £300,000 and savings of £15,000, you only have to pay interest on £285,000.
This flexible mortgage allows you to either reduce your monthly payments or shorten your mortgage term. You don’t pay any tax on your savings as you’re not earning any interest on them and you can withdraw funds from your savings account when you need to. A higher rate of interest is usually payable for an offset mortgage than a standard mortgage.
Other mortgage types
These are the main mortgage types but many mortgages cater to individual needs and circumstances. These can include deals for first-time buyers, the need for a guarantor, shared ownership options, mortgages for commercial or investment properties, and so on.
First-time buyer mortgages
All of the mortgage types detailed above will be available to you as a first-time buyer but many lenders offer mortgages with incentives to help you get on the property ladder. This can include offering you a higher loan-to-value ratio to accommodate you paying a lower deposit or offering you lower fees. Some mortgages are discounted at the start of the term so that you have some spare income to cover extra expenses, such as moving costs and renovations.
A guarantor mortgage
If you’re struggling to get on the property ladder or want a bigger mortgage than you can afford on your own, a guarantor mortgage may be the solution. This is when a relative guarantees your loan by becoming liable for your mortgage repayments if you are unable to make them.
Shared ownership is a compromise between buying and renting. Via the government’s Help to Buy: Shared Ownership scheme, you can buy between 25% and 75% of a property’s value and pay rent on the remaining portion at a discounted rate.
When you’re looking to purchase a property with the intention of renting it out as an investment, you need a buy-to-let mortgage. As well as taking your personal finances into account, lenders will consider the amount of rental income you’re expecting to receive.
Bad credit mortgages
If you have a bad credit rating, it’s hard to secure a mortgage through a mainstream lender. Specialist lenders, however, offer bad credit mortgages. You may be asked to pay a larger deposit than you would for a standard mortgage and a higher rate of interest is usually charged. This is because you are considered to be a higher risk to the lender if you have adverse credit. The more deposit you can pay and the less you need to borrow, the more mortgage deals will become available to you.
A commercial mortgage
When you need a business loan for over £25,000, a commercial mortgage is a secured loan. Commercial mortgages usually have higher interest rates than residential mortgages but are more favourable than normal business loans because your property is used as collateral. You can use a commercial mortgage to buy a property to use as your business premises, for commercial investment purposes or for property development.
A let-to-buy mortgage allows you to let out your current home so that you can get a mortgage to buy a new home with. The process actually consists of two mortgages. To rent out your existing home, you need to convert your residential mortgage into a buy-to-let mortgage. Then you need a standard residential mortgage to buy your new home. Securing a let-to-buy deal can be a complicated process as lenders expect you to meet the different application criteria for each of the two new mortgages.
Mortgages for self-employed applicants
The application process for a mortgage is a bit more challenging if you’re self-employed as lenders take into account that your income can fluctuate. The same mortgages are available to you as to everyone else and the amount you can borrow depends on whether you operate as a sole trader, in a partnership or as a director of a limited company.
This type of mortgage offers you more flexibility. The extent of the flexibility depends on the lender but you can usually overpay or underpay, withdraw lump sums, take payment holidays and repay your mortgage early. The interest rate for this type of mortgage is usually higher but you don’t pay penalty fees for using any of the features. An offset mortgage is an example of a flexible mortgage.
A self-build mortgage provides you with the funds needed to build your own property. The funds are released to you in stages as the build progresses, either in arrears or in advance. The interest rates are generally higher than they are for standard residential mortgages or remortgages but you can usually switch to a different mortgage product when your property has reached a habitable level. You also have the potential to make considerable savings on stamp duty and should benefit from a significantly increased value for your finished property.
When you’re retired and your pension is your only source of income, some lenders will still offer you a mortgage. Whilst many lenders have age restrictions for their products, specialist lenders are more flexible. If you already own a property, you can take advantage of special products that are only available to older applicants. These can include a lifetime mortgage and a retirement interest-only mortgage.
Let us help you choose the right type of mortgage for your needs
Our professional mortgage brokers in Kent, London and Edinburgh are ready to help you choose the best mortgage type to suit your circumstances. They can discuss your situation, guide you on how much you can borrow and talk through the range of mortgages with you to get the best fit for your needs.
When you’ve made a decision, our mortgage experts can work swiftly to find and secure a competitive mortgage deal for you. At Trinity Finance, we benefit from having access to an unrestricted range of first and second charge lenders. This means we are not tied to specific ones and allows us to search the market for the best mortgage deal for your requirements. We provide you with completely impartial advice so that you can make an informed decision about your mortgage product. We tailor-make your application for the strongest chance of success and, once you’ve received a mortgage offer, we oversee the entire process to ensure it runs smoothly from start to finish.
Get in touch with us on 01322 907 000 to speak with our friendly mortgage advisers about the various mortgage types available. Whatever your circumstances, whether you’re a first-time buyer, investor, self-employed or retired, our experts can help you narrow down the options to find one that best suits your situation. Alternatively, send an email to us at email@example.com and one of our mortgage consultants will reply to you as quickly as possible. Our mortgage brokers are here to take the stress out of making a decision and ensure your choice is the right one for your needs.