Finding the perfect mortgage that meets your needs is crucial if you wish to successfully enter into the market for property. The issue is, where do you begin? If you don’t have any knowledge about the various kinds of mortgages or what they are it is likely to make you a bit confused.
While all have the same goal (i.e. loaning you money to purchase property at a specific rate of interest which you’ll be required to repay over a period of time) There are a variety of kinds of mortgages that are offered. They include:
Repayment
Interest-only
Fixed
Variable
Tracker
Capped
First-time buyers
The High Percentile (i.e. mortgages that are 95 percent or more)
Discount
Offset
Flexible
Cashback
Buy-to-let
The issue is, what does each one mean? While some are fairly straightforward some are ambiguous and ambiguous. It’s the perfect time to shed some understanding of the various types of mortgages UK homeowners can pick from!
Repayment
Let’s begin by introducing the most popular of all: repayment mortgages. Repayment mortgages form the basis for the majority of the other mortgages in the market whatever their glitzy names and phrases.
The principle is straightforward: you take out an loan from an institution and then repay it over time which could range from between 40 and 40 years in modern times, but is more often between 20-30 years. Every month’s installment will pay part of the amount borrowed and a part of the interest that is attached to the loan. When the period you have set has been completed, the loan is paid in full and the property becomes yours.
Naturally, when talking about long durations that are a long time span, the possibility is that you’ll be looking to move before the period runs out in which case obviously possible. The options are fairly straightforward in this case: you can either transfer to the new home (take your mortgage along) or take the rest of the loan and then start with a new mortgage for the new home.
Interest-only
These are if you can think of a better term for calling them, the least interesting one that we have listed. Although, as we’ve mentioned previously that most mortgages are based on the basis of a repayment principal but interest-only mortgages function in a completely different way.
The name suggests that interest-only loans are based by paying the interest on the mortgage every month. It’s a great idea when you discover the amount you’ll need to pay each month, but you’ll still have to pay for the loan’s capital at the time that the loan term is over. This means that you must be sure that you have enough money in the bank after the loan expires and you’re required to sell your house.
The majority of buyers who take advantage of interest-only mortgages Northern Ireland choose high-interest savings accounts with fixed rates that secure their money in order to guarantee they will have enough funds to cover the mortgage at the time however, some have become more inventive over time. But, it’s important to keep on your mind that loan providers could request to know exactly what you intend to do to repay the amount borrowed prior to stumping up the money, so keep this in mind when approaching a bank or a building society to get this kind of loan.
Fixed rate
A favorite among first-time buyers as well as everyone else during periods of uncertain times (hello Brexit! ) The fixed-rate mortgage. It is also type of mortgage that fulfills exactly what it states on the label, namely that the rate is fixed for a specified duration of time. The timeframe could range between two years for the lower end and into 10 years or more in certain cases.
The advantage of the fixed rate loan is clear: you are aware of exactly where you are for the length of the fixed term. No matter what happens elsewhere, your monthly payments will be the same each month until the period expires. When the loan is finished, it will be converted into the standard variable rate of your lender (SVR) which means you’ll have the option of switching lenders or request a fixed rate with your current provider should you decide to move to another one.
Of course, there’s a negative side also. If rates for mortgages drop in the future, you’ll have to pay the loan off at a higher rate, while other people benefit from a decrease in their monthly installments. In addition, you’ll be obligated for the length of the term, which means that if you choose to pay off, change or cancel the mortgage before the specified timeframe has been completed, you’ll need make a payment for an early-payment cost which will be determined at the time you sign the agreement.
Variable rate
As we’ve mentioned the lenders will have an average variable rate that they base their other products on and it’s that variable rate that the fixed-rate mortgage is reverting to once the fixed time is over. This will be the lender’s primary mortgage.
The variable aspect refers on the rate of interest that you pay on the loan amount which can go both ways. Mortgages with variable rates are tied to the base rate of the Bank of England. rate, however they are subordinate to the lenders’ requirements and requirements. This means that the rate could rise regardless of whether the BoE’s rate stays the same.
Trackers
The tracker mortgages, in contrast to SVRs that follow a specific interest rate, which is set by an amount, either higher or below the specified rates of interest. The rate that these mortgages typically follow is the Base rate of the Bank of Britain and, when they decide to raise interest rates, the BoE decides to increase the interest rate, then your mortgage’s repayments will increase in line with the BoE’s decision and vice versa if they choose to reduce them.
A aspect to consider when using trackers is that the lender’s specifications for the lower limit of their base rate. A lot of trackers will state that the loan will not fall below a specific rate, irrespective of what the BoE decides, while stating that there is no limit at the top portion. It means that their loan is protected by a standard profit margin, however there is no guarantee of your payments going through the sky.
Capped rate
If the final sentence of the preceding paragraph has brought you nightmares the fixed rate mortgage could be a better fit for you. These loans are capped in that your rate of interest will never go over the amount that you have agreed to pay when you apply for the loan, however you can still reap the benefits should the rate decrease.
Capped rate mortgages are however, extremely difficult to come across in the present time.
First-time buyers
First-time buyers are able to select any mortgage listed in the list (with one exception, buy-to-let) Some lenders might provide special offers only to those seeking to get onto an investment ladder first.
The mortgages are often connected to government schemes such as Help to Buy.
High percentile
Also referred to as 95 percent or 100 high percentile mortgages, these loans are available to those who aren’t able to put up a substantial investment to buy a house. They were virtually eliminated after the financial crisis of 2007, but they are beginning to enter the market again. In the wake of the launch of Help to Buy in 2013 also allows those who are struggling to get the typical 10 percent minimum deposit an opportunity to start their journey on the ladder, however it’s not free of risk.
Lending on these short-term margins can expose the buyer to the potential of negative equity. Without a cushion like an adequate deposit, home values only need to decrease by a small amount and the mortgage would end up being over that of the house the loan is secured on. The consequence of this risk is that lenders increase the rates in order to cover their risk, making monthly payments hefty in the process.
Although those who struggle to come up with a loan may think of these loans as a great method to get their first house but they should take note of risks of going through this process before putting on the to sign the dotted line.
Discount rate
The mortgages with a discount rate are provided at a lower rate than the rate of interest at which lenders offer their standard variable (SVR) in a specific amount. They are great when they have a stable SVR, if there’s a lot of volatility in the lending market, they can be an up and down ride since rates can rise and down.
As you would think, lenders usually limit the terms of these loans to a certain period generally ranging from two and five years.
Offset
Offset mortgages may not be the most sought-after loan type that we have listed, however they might suit a particular segment better than others. They are ideal for people with adequate savings and are in the tax band with the highest rates offset mortgages function in a distinctive way which combines your savings and your mortgage together.
In essence, with an offset mortgage you’ll be charged interest on the difference between the amount you pay for your mortgage and savings. For instance that someone who has PS25,000 mortgage and PS200,000 in savings would only pay an interest rate of PS175,000. This is calculated month-to-month.
Although your savings will be available, eating into the funds you have available will reduce the amount you offset with, which will increase the term of your mortgage. Savings won’t earn interest if used to offset the mortgage, however that there’s no tax to pay, which is the reason that those who are who are in the tax brackets with higher rates could find this type of loan appealing.
Flexible (or flexible)
Flexible mortgages are typically sought for those who aren’t sure of the stability of their income from month-to-month for instance, those who work for themselves, for instance. The name itself suggests that flexible, or flexi mortgages permit you to pay less or more every month, and some allowing you to not pay in full for a few months in the event that circumstances become difficult.
The drawback? Flexible mortgages are usually available at a higher amount of interest from the lenders.
Cashback
Cashback was popularized in the late 90s, in the 90s when card issuers began offering cash back on purchases as an incentive to encourage consumers into selecting their product over a rival cards. Cashback mortgages function in the same way. You’ll receive a specific amount on your loan, typically an amount of percentage, when decide to choose a particular product over other.
Cashbacks can be an impressive amount of money when you’re discussing a loan that’s several hundred thousand pounds however it’s not free money. Be sure to check the interest rate you’re paying for and read the small print prior to signing up. There are usually better rates if you look at everything.
Buy-to-let
Our final choice of different kinds of mortgages available in the UK is buy-to-let.
Buy-to-let mortgages are available to those looking to buy a property to rent the house out rather than living there. The calculation involved with a buy-tolet mortgage differ from those mentioned above because the lender is typically looking at the amount of rent that the property is expected to generate in determining how much they will give.
This is all there is to it, all 13 kinds of mortgages explained! We hope you’ve got an understanding of UK mortgage kinds, but if require assistance on anything related to property, call us or drop us an email. We’re always ready to help.
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