Time to talk mortgages
Types of Mortgages
You repay some of the capital you have borrowed + some of the interest on the loan
Your aim is to pay back the original loan amount + interest over an agreed term
This allows you to build equity over a period, and own your home
If you move before the duration of your mortgage, you can repay the original loan, take out another mortgage, or transfer the deal you have over to a new home
This process is called “porting your mortgage”
Repayment deals are great for homebuyers looking to build equity overtime with an aim to own the property outright.
You only pay the interest on a mortgage amount monthly
You do not pay towards the capital borrowed monthly
The capital loan amount is paid back in full at the end of the mortgage term agreed.
Your monthly payments will be lower than a repayment mortgage
If you cannot pay the full loan amount at the end of the agreed term you may need to sell the property to cover what you owe
Paying back interest on the whole loan, rather than a repayment option of the loan amount which decreases your debt, you will end up paying more over time with an interest- only deal
This type of mortgage is great for people who wish to have lower monthly payments but know long term they will have the funds to pay off the mortgage in term agreed.
Did you ever play stuck in the mud as a kid?
It is not complicated!
The interest rate is fixed for a set amount of time and is not affected by the Bank of England and how it affects the fluctuations in the market
You will be locked into a set rate for a set period
If you leave, you will be required to pay an exit fee
The fixed rate period (IRP) is first two, three or five years of the term. You will have a structure set rate over these time period. This ends when the fixed term ends.
Fixed rate mortgages are great for first time buyers who are budgeting for the first few years
Fixed rate mortgages provide security
Fixed rate mortgages are great for budgeting
Fixed rate mortgages are great for homeowners who want to lock into a base rate, if they suspect the rate will rise
Fact: When you take out an interest only mortgage you can lock in your mortgage interest rate which is super if you suspect The Bank of England base rate will increase!!
Once you are locked in, it’s difficult to switch due to the hefty penalty you will incur. You will also not benefit from a fall in interest rates
The rate is not fixed, it can rise or fall at any time
How much you pay each month is subject to change
The rate is affected by the Bank of England base interest rate and other denominators
Standard Variable Rate (SVR)
The interest rate is set by the lender
The lender can increase or decrease the mortgage rate you pay monthly
SVR gives you freedom to overpay, and leave your mortgage without high penalties
SVR makes it difficult to budget for the future
Variable Rate Mortgages are best for:
Homeowners with a desire to switch mortgage products with ease to suit their changing needs and lifestyle
A mortgage that allows you to link your mortgage and your savings together, this reduces the amount of interest you are charged
The value of your savings is offset against how much you borrow on a mortgage loan, you are only charged interest on the amount left over
The mortgage is a rate applied to a reduced amount covered by your savings, so naturally the interest will be lower
Let’s break it down:
If you have £15,000 in savings, and a £100,000 mortgage, you would pay interest on £85,000. The interest rate if set at 3% means you will pay £2,550 in interest per year.
When you off set your savings, you are unable to earn interest
You do not pay tax on your savings when you offset your mortgage, beneficial for those in a higher tax bracket.
Who is suitable for an offset mortgage?
Let’s off set this mother!
Homeowners with savings, especially those in a high tax bracket. Or if you are a relation who wishes to help a first-time buyer, some lenders will allow you to offset your savings to help a friend, or relative to access a better mortgage rate.
A mortgage that gives you the freedom of how you repay the property loan
Options can include:
- Take a payment break
- Borrow money back
- Interest rates can be calculated daily
- Overpayment option
- Underpayment option
- Let us just break this down a little further to avoid any confusion
Let us just break this down a little further to avoid any confusion:
1. Payment Breaks: this gives you the ability to freeze payments for a month or two – great if you are anticipating a dip in your income. Be aware interest is still charged during your break, and you will need your lender to approve a freeze in payments which is deemed more acceptable if they have evidence of overpayments.
2. Borrow Back: If you have overpaid during your mortgage term, some company lenders will allow you to borrow back. Now the purpose of overpaying is to reduce interest, but if you needed money to pay for something unforeseen this flexible option allows you to release funds you have already put toward your mortgage. This is actually a good way to save money because there is a reduced rate of interest overpaying into mortgage as the interest is usually greater than paying into a savings account.
3. Interest Calculated Daily: Having your interest calculated daily works out less expensive than paying for interest monthly or yearly. The interest calculation worked out for the next day is calculated off your reduced payment, paid the day previous. If you can overpay one day this works out even better for the interest you pay as it has a direct lowering impact on your next daily charge.
4. Overpayment: this means you are paying more than the agreed amount. Most people will pay a lump sum if they have any spare money to reduce the overall sum with the intention of lowering interest rates
5. Underpayment: an under payment needs to be agreed by a lender and is usually agreed on a period where you have overpaid enough that you cover a period of under payment
What is a 95% mortgage?
A mortgage loan where you borrow 95% of the loan with only a 5% deposit
With a deposit of £12,500 you could secure a loan of £237,500
A lesser deposit means there is a greater risk of falling into negative equity, because these lenders charge a high interest rate on a 95% mortgage loan to cover a potential loss.
This makes it difficult to build up equity in a home, thus making it challenging to remortgage when the deal ends
This type of mortgage is useful if you are struggling to save for a larger deposit
Who is best suited to a 95% Mortgage?
Are you a non-saving party animal in need of a mortgage, or simply someone on minimum wage struggling alone?
This could be the winning ticket!
What is a Capped Mortgage?
A capped variable rate mortgage price that will not rise above a certain rate
Available most commonly on a tracker mortgage or SVR mortgage
Not a common mortgage for lenders to offer
The repayments will not rise to a level you cannot afford. You are protected from high a rate increase
Many capped mortgages have something known as a collar, which is another cap that prevents your rate from falling below a certain level. You will not benefit from a low rate, if it falls.
Who is suited to a Capped Mortgage?
Homeowner who do not wish to protect themselves against rates rising and are not worried by having a capped rate even if rates fall.
What is a joint mortgage?
A mortgage loan taken out with one or more person(s)
Each person is named on the loan stating the equity split
Each person is responsible for paying for their share of the mortgage loan
Joint mortgages are open to couples and groups
Most mortgage types give you the option for joint deals
A joint mortgage allows you to put incomes together to buy a more expensive property
Each person’s earnings, credit history, and monthly spend are calculated to see how much you can borrow to create a combined offer
Having a combination of savings can help pay a higher deposit giving you access to better mortgage rates and terms
The new Help to Buy: Equity Loan (2021-2023) scheme
What is it and how does it work?
The low down…
Basically, the government will loan home buyers up to 20% (40% in London) on the cost of a new build property only.
You will still need a minimum of a 5% deposit or more and to arrange a mortgage of 25%or more to make up the rest. The loan by the government is interest free for the first five years, but you will be charged an increase in interest per year thereafter.
Fact: Help to Buy has already helped a whopping 270,000 by 2021 sadly this scheme is set to end in March 2023, so going with a mortgage advisor such as MTGE who understand the Help to Buy process can help speed things along…Oh and remember we do not charge you a broker free either.
So where can you find a new development that is support by The Help to Buy Scheme near you?
Click on the link and pop in your postcode to find government approved builds near you: https://www.newhomesforsale.co.uk/
How much can you borrow with The Help to Buy Equity Loan?
How much you can spend on a new property is actually capped by region due to the variation in property prices.
- In the North East property pricing is capped at £186,100
- North West £224,400
- Yorkshire and Humberside £228,100
- East Midlands £262,900
- West Midlands £225,600
- East of England £407,400
- London £600,000
- South East £437,600
- South West £349,00
(Keep an eye on the government site for up to date details, as these price caps may change: www.helptobuy.gov.uk/equity-loan )
The most important thing to remember is this the Equity loan supplied if approved is only 20% of the property value (40% in London), this means you still need a deposit of a minimum of 5% and to be able to prove you can afford to pay back the loan of the additional amount required for a mortgage on the property too. Make sure you understand the amount of interest you will be paying back on both the government loan (free interest for the first 5 years) and the mortgage loan.
How does the interest rate increase on the Help-to-buy Equity Loan?
As mentioned, you pay nothing for the first 5 years, thereafter your interest will increase by 1.75% rise each year by the Consumer Price Index including owner occupiers housing costs (CPIH) plus 2%. You also pay a monthly management fee of £1 for the duration of your loan. Homes England secure the equity loan as a second charge on Your Help to Buy home.
A good mortgage broker will make you aware of all the fees you are legally required to pay and will guide you through every step of the process from application to completion. You should be made aware of all expenses relating to your loan and mortgage. Please note conveyancing and solicitor fees are charged separately.
For more details on how the Help to Buy Government Equity loan scheme works click on the link below today: www.helptobuy.gov.uk/equity-loan
If you are still unsure whether you can qualify for a Help to Buy Equity alone all you need to do is drop us a line or give us a call and we will see if we can help you buying that dream home a reality.
What is a buy-to-let mortgage?
What are the key differences with a residential mortgage (a property you inhabit) and a buy to let mortgage?
Buy to let
- The amount you borrow it not assessed on just your income
- Lenders will consider the amount you are expected to earn as an income from tenants
- A lender will usually require annual rental payments to be 125% of the mortgage
- The fees and interest rates are typically higher
- The minimum deposit required to put down is between 20-40% of the property’s value
What types of mortgages are available for buy to let?
Interest only and repayment buy to let options are available
Most landlords opt for an interest only option to reduce monthly payments
A repayment buy to let mortgage is a better option to void paying off a huge amount later down the line
Buy to let mortgages eligibility:
- Good credit history ideally
- Required income as normally this will be taking on the income of a second mortgage
- Most lenders will not take on first time buyers for a buy-to-let loan
“I just wanted to say how amazing Neil has been over the last 9 months with regards to my mortgage. He has gone above and beyond to solve problems to ensure I completed as soon as possible. He is an absolute credit to your team and has kept me calm as well! I will absolutely be recommending you to friends in the future."