What is a mortgage?
A mortgage is a loan used to buy a property, but one which is secured on that property. This means that the mortgage provider (a bank or building society) retains an interest in the property until the entirety of the loan is paid back. There are different types of mortgage schemes available.
Each mortgage scheme is classified by the way the interest on them is charged, or how the interest rate changes over time. Each has its own advantages and disadvantages. If you do not keep up repayments on the mortgage, they have the right to repossess the property.
This is the basic way of repaying all mortgages, however specialized they are, apart from interest only loans which are different. With repayment mortgages, each month you repay some of the interest you owe plus some of the capital you’ve borrowed. At the end of the period, often 25 years, you’ll have paid back everything you owe and you’ll own your home outright.
Of course, you’re likely to move within the 25 years. In this case, you might be able to take the mortgage with you (called ‘porting’ your mortgage) or you can repay the original loan and take out a new one. It could be that by the time you move, your house has gone up in value, and anyway you will have repaid some of the capital. So next time, you can put down a bigger deposit and possibly find a new mortgage at a better rate of interest.
With interest-only loans, you pay just the interest month by month and repay the capital at the end of the period with money you’ve saved elsewhere. This is quite different from a repayment mortgage because at the end of the loan you’ll have to find enough money to repay the whole debt. You can save up any way you want or use money from an inheritance, but you must be confident of having the money to hand when the time comes to repay. If you don’t, you might have to sell the house to pay off the mortgage. There’s still a risk that won’t be able to repay the mortgage on time so, before granting an interest-only mortgage, lenders can insist you show them how you intend repaying the loan at the end.
The big advantage of interest-only mortgages is that your monthly repayments are lower than with any other mortgage because you are paying only the interest due. If you find you’re getting nervous about being able to repay the loan on an interest-only basis, you may be able to switch to a repayment loan at a later date.
Variable rate mortgages
Every lender has a standard variable rate (SVR) mortgage. The interest rate goes up and down as mortgage rates generally change. They are partly influenced by the Bank of England base rate, but other factors come into play as well. The interest rate you pay on an SVR mortgage can change even without base rate moving, and similarly base rate might come down but your mortgage rate stays the same.
Tracker mortgage schemes
Tracker mortgages move in line or track a nominated interest rate which is usually the Bank of England base rate. The actual mortgage rate you pay will be a set interest rate above or below the base rate. When base rate goes up, your mortgage rate will go up by the same amount. And it’ll come down when base rate comes down. Some lenders set a minimum rate below which your interest rate will never drop, but there’s no limit to how high it can go.
Discount rate mortgages
The discount is a reduction on the lender’s standard variable rate (SVR). Mortgages with discounted rates are some of the cheapest around but, as they are linked to the SVR, the rate will go up and down when the SVR changes. The deal lasts for a fixed period, typically 2 to 5 years.
Capped rate mortgages
This is a variable rate mortgage but one with a ceiling (a cap) on how high your interest rate can rise. You have the comfort of knowing that your repayments will never exceed a certain level while you can still benefit when rates go down. As mortgage rates generally have been low in recent years and there are better deals around, lenders don’t often offer capped rate mortgages at the moment.
Cashback mortgage schemes
This is a marketing incentive sometimes offered by lenders. When you take out their mortgage, they give you money back, typically a percentage of the loan. You need to look carefully at the interest rate being charged and any additional fees as you’ll likely find cheaper mortgages without cashback.
Offset mortgages are linked to a savings account and combine savings and mortgage together. Each month, the lender looks at how much you owe on the mortgage and then deducts the amount you have in savings. You pay mortgage interest just on the difference between the two. This cuts the amount of interest you pay, but the mortgage rate is likely to be more expensive than on other deals. You can still access your savings if you need to, but the more you offset, the quicker you’ll repay your mortgage. When you use your savings to reduce your mortgage interest, you won’t earn any interest on them, but you won’t pay tax either.
Forces Help to Buy
Forces Help to Buy is a mortgage scheme that helps armed forces personnel get on the property ladder.
The scheme enables servicemen and servicewomen to borrow up to 50% of their salary, interest free, to buy their first home or move to another property on assignment or as their families needs change.
You can read our FREE Forces Help to Buy Guide HERE.
These are for people who can afford only a 5% deposit. With such a small deposit, you are at risk of falling into negative equity if house prices go down. Because of the risk, lenders will charge a comparatively high mortgage rate. There’s more information for people with 5% deposits in the government’s Help to Buy scheme (Own Your Own Home) and our Help to Buy guide.
Flexible mortgage schemes give you more leeway with making repayments. You can choose to pay in more than your regular amount when you can afford it (this option is also available on many other types of mortgage). And, unlike other mortgages, if you have already overpaid you can pay less if you hit a difficult patch or even take a payment holiday and miss a few payments altogether. In return for this flexibility, the mortgage rate will be higher than on other deals.
First-time buyer mortgages
First-time buyers can apply for any of the types of mortgages listed above. The Government also has schemes to help people struggling to get on the mortgage ladder with its Help to Buy schemes. You can read more about first-time buyers HERE.
Buy-to-let mortgages are for people who want to buy a property and rent it out rather than live in it themselves. The amount you can borrow is at least partly based on the amount of rent you expect to receive. First-time buyers are unlikely to be allowed a buy- to-let mortgage.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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