Understanding mortgage options is crucial for homeowners seeking to maximise their property investment.
It is essential to understand the basic principles first. A mortgage is a loan specifically for buying property, with the property acting as collateral. In the worst-case scenario, if you are unable to repay the mortgage, the lender has the right to repossess the property and sell it to recoup the debt.
Typically, mortgages come with interest rates and repayment terms that vary depending on the lender and the type of mortgage chosen.
Choosing the Right Mortgage:
When selecting a mortgage, it’s essential to consider your financial circumstances, risk tolerance, and long-term goals. Consulting with a mortgage advisor can provide invaluable guidance in navigating the complexities of mortgage options and finding the perfect fit for your home purchase.
Get in touch with either Adam Dumbrill or Matt Langley who can help you with all your mortgage enquiries.
Fixed-Rate Mortgages:
A fixed-rate mortgage is one of the most traditional mortgage options. This option requires consistent monthly repayments that have been agreed at a set interest rate, for a specific time period (typically between two – five years).
One of the key benefits of this type of mortgage is that it provides stability and predictability for homeowners during the fixed period, and therefore helps when budget planning. Once the fixed period ends, the interest rate changes to the lender’s Standard Variable Rate (SVR), which may be higher than the initial rate.
Variable-Rate Mortgages:
Variable-rate mortgages provide interest rates that can change depending on market conditions. Although this choice may present lower initial interest rates in comparison to fixed rate offers, homeowners should acknowledge the risk of possible rises in monthly payments if interest rates go up, as was the case throughout 2023. Variable-rate mortgages are ideal for individuals who are at ease with some unpredictability and could gain from potential savings if interest rates stay low.
Tracker Mortgages:
Tracker mortgages are a type of variable-rate mortgage where the interest rate is directly linked to a specific benchmark, typically the Bank of England’s base rate. This means that the interest rate is made up of the base rate plus a fixed percentage that is set by your lender; as the base rate changes, the interest rate on the mortgage does too. This option provides transparency and can result in savings if the base rate remains low or even decreases. In contrast to this, if the base rate rises, so will the interest rate. This mortgage can last anywhere between 2 – 10 years.
Discount Mortgages:
This is another type of variable-rate mortgage; it sets the interest rate below the lender’s standard variable rate (SVR) by a specific percentage. While this choice provides initial savings, homeowners again need to be cautious and aware of the fact that the interest rate may go up if the lender’s SVR increases.
Interest-Only Mortgages:
Interest-only mortgages enable homeowners to solely cover the interest on the loan for a set period, usually spanning from a few years to a decade. This mortgage is most commonly used for buy to let investors and is one of the more rare types of mortgages. Although this choice provides lower monthly payments at the start, homeowners will eventually need to repay the borrowed principal amount. Interest-only mortgages are a good fit for individuals expecting a rise in income or aiming to sell the property before the interest-only period ends. This option is a good example of why understanding thoroughly evaluating your financial situation, risk tolerance, and long-term objectives before finalising any mortgage agreement is so important.
Repayment Mortgages:
In contrast to interest-only mortgages, repayment mortgages require homeowners to make monthly payments that cover the interest and a portion of the principal amount borrowed. Over time, the outstanding balance of the loan is reduced until it is repaid in full. A key benefit of this option is that repayment mortgages provide peace of mind, knowing that the loan will be paid off by the end of the term.
Capped Rate Mortgage
A capped rate mortgage is a type of variable-rate mortgage that includes an interest rate limit/cap. This cap shields borrowers from significant rate hikes while still enabling them to take advantage of rate reductions. This mortgage option strikes a balance between flexibility and security. Once the capped period ends, the mortgage typically reverts to the lender’s standard variable rate (SVR) or another agreed-upon rate.
Offset Mortgage
An offset mortgage offers a clever strategy to use your savings to reduce mortgage payments while keeping the funds readily available for emergencies or other purposes. This mortgage type links your savings and/or current account balance to your mortgage debt. Instead of earning interest on savings independently, the savings amount offsets your mortgage balance, ultimately lowering the interest payments.
For example, if you have a mortgage worth £300,000 and a separate savings account with £15,000 in it, with an offset mortgage linked to the savings account would mean that you only pay interest on £285,000 of the mortgage. However, if you withdraw money from the linked account you will have to pay interest based on the amount you took out. If you took out £5,000 for whatever reason, you would then have to pay interest on £290,000 of the mortgage.
The Mortgage Charter:
In June 2023, the UK Government launched the Mortgage Charter to provide additional assistance to customers holding residential mortgages who are concerned about meeting their payments. The set of measures laid out in the Mortgage Charter do not apply to buy to let investors.
The Charter, established by the UK Government, principal mortgage lenders, and the FCA, comprises three crucial components:
- Individuals can freely consult their bank or mortgage lender for guidance without affecting their credit rating.
- Homeowners can opt for an interest-only mortgage or extend their mortgage term, with the ability to revert to their original mortgage deal within six months without repercussions on their credit score.
- Homeowners are safeguarded from home repossession within 12 months of their initial missed payment
Customers that are nearing the end of a fixed-rate agreement will have the option to secure a deal up to six months in advance and still be eligible for improved offers until the new term begins. Those currently with payments at the end of their fixed term will not require affordability checks when switching to a new mortgage deal.