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Mortgage Types Jargon Busting with Heritage Mortgages
Luke Atkinson from the Heritage Mortgages team helps break down the different mortgage types and terms.
A fixed-rate is probably the most common type of mortgage. It means that the lender will guarantee your mortgage payment for a certain period of time, usually, two years, sometimes three, or even five years. As a borrower, that gives you stability and the ability to budget because you know exactly what you’re paying.
At the end of the fixed-rate period, you revert to the lender’s standard variable rate – which can put your payments up considerably. At Heritage, we would contact you before that point to review your circumstances and find you a new rate to avoid that payment increase.
Tracker rate mortgage
With a tracker rate you have more flexibility to change the amount you pay each month – you can make lump sum overpayments if, for example, you receive big bonuses, you’re expecting some inheritance, or even want to repay the mortgage in full.
But your payments will be unpredictable on a tracker mortgage. They change in line with the Bank of England base rate and can either increase or decrease.
An offset rate applies when you have a large amount of savings. You put them in a savings account alongside your mortgage. And the amount that you have in savings will be taken off the total on which you owe mortgage interest.
So if you’ve got £100,000 in savings and a £100,000 mortgage, you would pay no mortgage interest at all. Every time you make a mortgage payment you’re simply reducing the capital. At a time when savings rates are quite low, it’s a good way to use your savings to reduce your mortgage as quickly as possible.
Types of mortgage repayment
There are two distinctive types of mortgage repayment – capital repayment and interest-only. Capital repayment is lower risk and more common – it means each monthly payment includes both some of the capital that you originally borrowed, plus some interest. If you make every single payment within your term of 20, 25, 30 years, you will completely repay the mortgage debt.
With interest-only you only pay interest each month and the amount you borrowed never goes down. It’s usually chosen by people who are expecting large lump sums or to sell the property to repay the debt. It’s a higher risk and only really fits certain people’s situations.
There are a few features of a flexible mortgage:
Cashback: Sometimes the lender will give you cashback once your mortgage completes, totalling up to £1,000. If you have put all your savings into your mortgage deposit this cashback might help you buy furniture for your new home or pay your legal bills.
Overpayments: If you can pay more than your contractual mortgage payment each month you will pay back your mortgage more quickly and reduce the overall interest. Choosing a mortgage that allows overpayment is useful if you receive bonus payments or are expecting large lump sums from family or inheritance.
Payment breaks: Once you’ve made a certain number of consecutive payments to the lender, you are entitled to miss a mortgage payment for a month or two – perhaps to take some time out to do some traveling.
Porting: Here, your lender will allow you to move your existing mortgage from one property to another with no charge, as long as there are no fundamental changes to the mortgage details. So you could move house even on fixed-rate mortgages, which usually involve early repayment charges if you choose to end the deal early.
Joint Borrower Sole Proprietor (JBSP) mortgages
A JMSP mortgage allows two, three or four people to get a mortgage jointly, but only puts one of those people onto the title deeds. It allows somebody with a low borrowing capacity or low income to borrow more – by allowing a family member or friend to boost the loan by using their income.
Because that person isn’t going onto the title of the property, if they already own a home they won’t be eligible for stamp duty. This is quite a big saving – about 3% of the purchase price.
What is the Help to Buy Equity Loan?
This is a great scheme. It effectively allows First Time Buyers to buy a property with a 5% deposit, and they receive a loan from the government for an additional 20%. That loan is interest free for five years, and it means you are borrowing at a much lower loan to value so you get much lower mortgage rates.
It’s only available on new build properties, to First Time Buyers and there are limits on the property price.
With Shared Ownership you jointly own a property with a Housing Association. You might buy 30% of a property, paying a mortgage on this share, plus rent on the 70% to the Housing Association. As your income grows, you gradually increase your percentage ownership – it’s what we call staircasing.
Right to Buy
Right to Buy applies to council tenants that have lived in a property for at least two years. They are able to buy that property from the council with a discount on the purchase price. The longer you’ve been a tenant with the council, the higher your discount. It’s a good way of purchasing a council property because the discount can act as your deposit.
How can a Mortgage Broker help?
At Heritage Mortgages we will get to know you and your property plans so we can find you a suitable mortgage deal. It doesn’t cost anything to speak to us for an initial chat and advice. We speak to clients for two or three weeks before they make a decision.
We will talk through our charging structure with you, but until you’re ready to make a decision on a property, there’s no cost and we can give you as much information as you need. Just give us a call and we’ll help you buy a home.