Types of mortgage

Answering the questions you have on the different types of mortgage available.

You’re probably asking yourself what’s the difference between a repayment, interest only, fixed and variable rate mortgage? Below we have explained the differences to help you understand what type of mortgage you may be looking for.

Fixed rate mortgage

With a fixed rate mortgage, you lender guarantees your interest rate will stay the same for a set amount of time (the ‘initial period’ of your loan), which is typically anything between 1-10 years. When this initial period ends, you’ll be switched to the lender’s default rate (or standard variable rate).

Advantages Disadvantages
Easier to set a budget: A fixed rate mortgage means that your repayments will be the same every month during your fixed rate mortgage term.

Your rates are fixed: As it’s fixed they aren’t going to change with the Bank of England interest rates. If the rate rises, your repayments stay the same.

Higher fees: It’s possible that the best fixed rate mortgage deal will come with a higher product fee.

No lower rate benefit: As the rate is fixed, your repayments stay the same, even if the base rate goes down.

Early repayment charges: Repaying your mortgage early, can often involve paying an early repayment charge.

Advantages

  • Easier to set a budget: A fixed rate mortgage means that your repayments will be the same every month during your fixed rate mortgage term.
  • Your rates are fixed: As it’s fixed they aren’t going to change with the Bank of England interest rates. If the rate rises, your repayments stay the same.

Disadvantages

  • Higher fees: It’s possible that the best fixed rate mortgage deal will come with a higher product fee.
  • No lower rate benefit: As the rate is fixed, your repayments stay the same, even if the base rate goes down.
  • Early repayment charges: Repaying your mortgage early, can often involve paying an early repayment charge.

Standard variable rate (SVR) mortgage

SVR is a lender’s default interest rate, and as stated in the name, will more than likely change during your term. This can mean your repayments maybe higher some months than others and can cause a headache when it comes to budgeting your finances.

Each lender is free to set their own SVR, and adjust it how and when they like. An SVR mortgage tends to be a mortgage out of a deal period, such as a fixed rate deal. After your deal expires you’ll find yourself on an SVR mortgage by default, which might not be the best rate for you.

Advantages Disadvantages
Maybe no early repayment changes: This gives you the flexibility to overpay, pay off the mortgage early or remortgage to a new deal.

Lower arrangement fees: Fees tend to be lower or a fee may not even be charged.

Repayments could be lower: If interest rates are low, your repayments could go down.

Higher rates: SVR mortgages tend to have the most expensive rates available.

Rate can change: If the interest rates go up, so will your payments.

Default rate: Your mortgage will default to an SVR after any initial offer rate ends if you do not remortgage. This means your repayments are likely to rise.

Advantages

  • Maybe no early repayment changes: This gives you the flexibility to overpay, pay off the mortgage early or remortgage to a new deal.
  • Lower arrangement fees: Fees tend to be lower or a fee may not even be charged.
  • Repayments could be lower: If interest rates are low, your repayments could go down.

Disadvantages

  • Higher rates: SVR mortgages tend to have the most expensive rates available.
  • Rate can change: If the interest rates go up, so will your payments.
  • Default rate: Your mortgage will default to an SVR after any initial offer rate ends if you do not remortgage. This means your repayments are likely to rise.

There are several different types of products that come with the standard variable rate that a lender sets, and therefore can be a little more complicated than a fixed rate mortgage. For more information on these products please get in touch with a member of the team by clicking here or calling 01564 791 117, and they can run through any questions you have and requirements.

Buy to let mortgage

Buy to let (BTL) mortgages are for landlords who want to buy property to rent it out. The rules around buy-to-let mortgages are similar to those around regular mortgages, but there are some key differences. Read on for more information about how they work, how to get one and what mistakes to avoid.

Who can get a buy to let mortgage?

You can get a buy to let mortgage if:

  • You want to invest in a house or flat;
  • You can afford to take on the risks involved with renting out a property;
  • You already own your own home, whether that is with an outstanding mortgage or out right;
  • You have a good credit record;
  • You earn more than £25,000 per year;
  • You’re under a certain age – this depends on the lender.

Discount mortgages

Lenders can offer a discount on their standard variable rate (SVR) for a set length of time, which is usually two to three years. These discounted rates are decided by each lender and so will likely differ.

Make sure you consider both the starting point of the SVR and the percentage discount rate. One lender may be offering a higher discount than another but their starting rate may be higher.

Example:

  • Bank A has a 2% discount off a SVR of 5% (so you’ll pay 3%)
  • Bank B has a 1.5% discount off a SVR of 4% (so you’ll pay 2.5%)

By looking at the above, it shows that Bank B has the lowest rate after the discount, although Bank A had the higher discount to begin with.

Self employed mortgages

Firstly, there is no such thing as a self employed mortgage. However, it can be a challenge to get a mortgage because you’ll need to prove you have a reliable income. But getting a mortgage when self-employed s certainly not impossible.

How to get a mortgage when you’re self employed

You should have access to the same range of mortgages as everybody else and will still need to pass an affordability test in the same way. The only difference is, that as you are your own employer you will need to provide more evidence of your income than others.

What will you need to provide?

This can vary on lender, however, generally you will need:

  • Two or more years certified accounts;
  • SA302 forms or a tax year overview from HMRC for the past two or three years;
  • Evidence of upcoming contracts – if you’re a contractor;
  • Evidence of dividend payments or retained profits your you’re a company director.

Tracker mortgages

Unlike other variable rate mortgages where they can change the standard variable rate at any time at the lenders discretion, a tracker mortgage will usually follow the Bank of England base rate to then set the interest rate you pay on your mortgage. So if the base rate goes up or down, your rate will too by the same percentage.

Loans usually last for two to five years, although some lenders will do it for longer, even for the duration of your mortgage.

Advantages

  • If the base rate drops, so will your mortgage payments.

Disadvantages

  • If the base rate increases, so will your mortgage payments.

Offset mortgages

This allows you to offset your savings You can link your savings or current account to your mortgage so that you only pay interest on the difference between what you have saved and what you owe. So if you have borrowed £200,000 and have £20,000 worth of savings, you will only pay interest on £180,000.

Since less interest is being taken out of your monthly mortgage payments than a conventional repayment mortgage, you will be able to pay off a greater proportion of your monthly repayments.

Your home may be repossessed if you do not keep up repayments on your mortgage. Some forms of buy to let mortgages are not regulated by the Financial Conduct Authority.

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