A mortgage loan is a loan you can secure against your home or property. But, your home or property stands a risk to be repossessed if you do not keep up your payments on your mortgage or any other loan secured on it.
Information they say is key to everything you intend to venture in, hence the reason for this write up. There is a long list of financial institutions responsible for mortgage loans in the UK.
There are many types of mortgage loans available in the UK, knowing which you are qualified for and which you’ll want to apply for is very essential, if you want to get a better deal. To get you up to speed, let us list out the various types available and how to access same:
a. Capped – rate mortgages – This is a type of variable mortgage that will not rise above a certain rate, meaning they have an interest ceiling or cap, beyond which your payments can’t rise. This capped rate is mostly for an introductory period.
How it works
This is the only rate type, other than fixed rate that give you payment security. The good thing about them is that your payment won’t go above a certain level, because they are variable rate, you also enjoy it when the rates go down.
Capped rate mortgage loan work in a similar way with other SVR mortgage products, And the initial mortgage interest is based on the official Bank of England‘s base rate. That is to say if the Bank of England raises its rate your interest increases, when it reduce its interest rate your interest automatically reduce.
b. Discount mortgages – A discount mortgage is a home loan where the
interest rate is pegged at a set amount below the lender’s standard variable rate (SVR). Though, it is for a fixed period of time, majorly for a period of years. Once you come to the end of that period, you start paying the costly SVR, unless you remortgage onto a better deal.
How it works
After you have taken a discounted mortgage, when repaying your mortgage, part of the interest charged goes to your lender and the other part towards repaying the money you’ve borrowed.
For example, if a lender has an SVR of 4% and the discount is 1.5%, the interest rate the borrower will pay is 2.5%. If the lender raises its SVR to say 5%, your discounted interest rate would surely rise – in this case to 3.5%.
The implication is this, if your interest rate rose, your monthly mortgage payment automatically rises but you would be paying additional interest, rather than paying back the money you borrowed.
c. Help to buy mortgages – Help to buy mortgage is more of a government scheme to assist first time buyers to get property with just a 5% deposit. The government lends you 20% of the value of the property. The good thing is, the equity loan is interest – free. Though, terms and condition applies as each lender has their requirement.
How it works
Under this are 4 government schemes that are designed to help aspiring property owners to be captured in the property bracket.
1. Help to buy: Equity loan – This means, if your wish is to acquire a new-build property and you must have saved up to a 5% deposit, you could be eligible for this.
More importantly, the government will lend you up to 20% (or 40% in London) of a new – build property.
To qualify for this mortgage loan, the following must apply:
• You must be a first time buyer
• The house must be a new-build
• You must not own another property
• It must not be sublet or rented out after purchase
• You must be able to prove beyond reasonable doubt that you cannot the property (if you’re applying in Wales).
2. Help to buy ISA (no longer open for new applications) –This is a tax – free savings account also aimed for first time buyers savings for a deposit on a property. The government this time pays 25% (£ 50) bonus for £200 you save into the account and just ISA, the interest earned is tax-free.
There is a certain condition to this though, 25% bonus is only paid if you have saved up to £1,600 or more.
How it works
Though as earlier said, ISAs are no longer open to new applicants. But, if you are an existing subscriber, they let you save up to £200 a month towards your first home with government adding a 25% bonus.
3. Help to buy: shared ownership –A shared ownership also known as part buy/part rent is where you buy a share of a home usually between 25% and 75% from the Landlord, the Landlord is usually the council or a housing association, the lender usually pay rent on the remaining share. It is usually a reduced rent on a new build or resale property.
4. Lifetime ISA – For those that missed out after the deadline for taking out a help to buy ISA, you find a Lifetime ISA (LISA) a suitable alternative.
With this, the government also adds a 25% bonus to your savings which is tax free, provided you use it to buy a first home or your retirement home.
You can save up to £400 per year into a LISA, your maximum yearly bonus would amount to £1000, and the account can remain open for a period of 32 years.
If you are age 18 – 39 you are eligible to open a LISA and the money can be used either for a deposit on a first home, or for retirement (that is when turn 60).
There are also Penalties for LISA.
The first one year, your funds are locked away. If you want to withdraw your savings you would be charged 25% of your deposit.
LISA is flexible, it can be transferred from one provider to another, it also allows you to chase the best rates, and you can be allowed to contribute to both a LISA and CASH ISA, within the same year.
d. Joint mortgages – Just as the name implies, joint mortgage is a type of mortgage you share with someone, you share legal responsibility of the loan with other co-owners of the home. Most often this is usually between multiple people – usually two, but occasionally up to four. This is very beneficial for those who can’t afford to buy a home on their own.
How it works
You can own a property jointly with 1, 2, 3, or even four persons, at most 4 of you can be on a property’s deeds.
You all must agree to be on the property deeds, so if at any point one of you wants to sell the property or apply for a loan against it value, all the owners must also agree to this. All the joint owners have a legal right to remain on the property unless a court order rules otherwise.
All two, three or four on the mortgage will jointly liable for the mortgage payments, if any one or more decides not to pay their share, the other partners will certainly have to cover the / their cost.
And yeah, you can as well take a mortgage loan with parents, and one or more friends, but you must trust them (friends) before you do that.
e. Buy-to-let mortgages – This is the practice of buying a house or apartment in order to make money by renting it to someone else, and not so that one can live in it. This product is aimed directly at prospective Landlords, rather than assessing the amount you can borrow solely on your income, the lenders will consider the amount to be charged as rent from the tenants.
How it works
The minimum deposit for this mortgage loan is usually 25% of the value of the property (although, it can vary in some instances between 20 – 40%). Most BTL loans are interest – only. The payment of the interest is on monthly bases, but not the capital amount. You only pay the original amount in full at the end of the mortgage term.
You have to pay for stamp duty on any property above £ 40,000 if it not your main home.
Mortgage fees also apply, several charges come with the mortgage like arrangement fee, may be higher.
Who is qualified for this mortgage loan?
Each lender has different requirements such as:
• How much rental income they expect you get from the property
• Your financial circumstances
These factors guide the lenders decisions on how much they’ll be willing to offer you.
f. Flexible mortgages – This is a flexible mortgage that allows you pay the whole loan off at any time. You can overpay and underpay as long as it suit your financial situation. A lot of people prefer the flexible mortgage because it allows them pay less in interest overall.
How it works
It comes with some common features offered by mortgage lenders such as:
• Overpayments – this means with a flexible mortgage you can decide to have an option of paying over and above the initial monthly payment, set by the lenders at the outset, at anytime or stage during the term. You have the option of a lump sum or as an increase to your regular monthly repayment plan.
• Underpayments – this is the direct opposite of over-payment. Though, you can be allowed to under pay a certain amount for a set period. Usually this comes with a condition, this option is only available once you have overpaid and already ahead of the original plan. This term may vary from lender to lender.
• Payment holidays – in unforeseen events you can take break from repayment just to get back on our feet.
With some flexible mortgages you can take a repayment break any time, normally not more than six (6) months. This comes to play with some lenders when you have previously overpaid. But, when you take a break the interest usually accrue, therefore, you may end up paying back more interest.
• Interest calculated daily – This is the cheapest way for a lender works out your mortgage interest, as any payment you make is taking into account immediately rather than wait for a monthly or yearly basis.
• Switching – the mortgage plan allows you to switch between different flexible repayment plan whilst incurring no early repayment charges or having to go through a remortgage application.
• Flexible mortgage savings account – though, this comes with a condition, if you overpay at any time of the mortgage, some lenders will allow you to borrow back that amount in the future if you need it. This mortgage repayment plan also allows you to save money on interest payment. You can also use the savings account for any future event.
g. Offset mortgages – This is a loan and lending arrangement, usually for a mortgage, in which the borrower also maintains a savings account with the lender. First requirement for this mortgage is to own a savings accounts with the lender. The savings account balance maintained in the deposit account may then be used to offset the mortgage balance, lowering interest payments due.
How it works
The good thing about this mortgage plan is it helps in keeping your savings and your home loan in the same place. Your savings are not used to pay up your off your mortgage. Instead, they sit in a separate savings account that pays no interest.
For example, if you have a mortgage £200,000 and you are paying an interest rate of 3.00%. You also have £ 20,000 of your mortgage in a savings account.
By offsetting £20,000 savings, you only pay interest rate on £ 180,000 of your mortgage. Over the course of the year this can save you up to £ 600.
With your offset mortgage, you can choose to either lower monthly payments or shorten the length of your mortgage term.
h. Guarantor mortgages – A guarantor mortgage is a home loan where a parent or close family relation takes on the risk of the mortgage by standing as a guarantor. With a guarantor on a mortgage, it provides the additional security for the borrower. Most lenders prefer the guarantor to be a close family member.
Types of guarantor mortgages
This mortgage plan comes with slightly different names and eligibility criteria, but they fall under one of these two categories:
Savings as security – Some lenders offer mortgages where one or more member of the family deposits cash (typically 5%-20% of the property price) in a savings account.
That’s the money that is held as security that covers you (the borrower), this is for set number of years, or the amount you owe falls below a certain percentage
(eg 80%) of the property value.
But, if you miss any mortgage repayments, the lender could hold on to your family member’s for a longer period.
Property as security – property as security deals involve a change being placed on a guarantor’s property. For you to be qualified for this, the guarantor must own a high promotion of their property outright.
Your family member stands to lose their home in the worst case scenario.
i. 95% mortgages – A 95% mortgage is a loan for 95% of a property’s price, by that the borrower deposits 5% to cover the balance. It means you borrow up to 95% value of a property and then pay back in installments.
How it works
This means you can borrow up to 95% of the property price from the lender. The remaining 5% is covered through your deposit.
This scheme is only available in England for now, anyone buying a home costing up to £600,000. This is not available for those purchasing a buy-to-let property or second home. This is only for those without a home.
The government’s role in this scheme is providing a partial guarantee to compensate banks if the borrower defaults on repayments.
j. Tracker mortgages – Tracker mortgages isn’t a fixed rate but usually track above the base rate. It’s a type of mortgage home loan where the interest rate charged on the loan goes below or above as soon as the external rate changes; this usually follows the bank of England’s base rate.
How it works
Like we established, tracker mortgage follow the bank of England‘s rate. If interest rates rise, your payments increase. If interest rates fall, you’ll make lower payments to your lender.
One thing is certain about this mortgage payment, you may never be able to predict or plan your mortgage payment in advance.
k. Standard variable rate mortgages – Standard variable rate (SVR) is an interest rate set by the lender and it isn’t fixed it could change every month. The interest payment is adjusted at a level above the benchmark or reference rate.
How it works
Unlike tracker mortgage, SVRs do not track above the Bank of England Base Rate at a set percentage. Your lender determines the rate you pay. If the Bank of England base rate jumps up by 1%, your lender could choose:
• Not to increase the SVR.
• To increase the SVR (they could choose to increase this by any amount less than 1%, 1% exactly or even make an increase greater than 1%)
• To decrease the rate (although this rarely happens)