So firstly, what is a mortgage? A mortgage is a loan, secured on a property. It is a way to borrow money from a lender, with the money lent used to purchase a house, with a contractual promise for this to be paid back over a set term. The interest paid on the loan is the cost of borrowing that money, and the reward for the lender agreeing to the loan – essentially how the lender’s money makes them money!
How much you pay back each month is determined not only by how much you’ve borrowed, and the rate of interest you’re paying, but also how long your mortgage term is, and whether you’ve opted for an interest-only or repayment mortgage. The cost of the interest is calculated on the underlying interest rate (set by the Bank of England) plus the perceived level of risk the lender is taking with their money. There are 4 main types of mortgage structure in the UK and these are as follows.
Journey Mortgages is qualified to advise which would suit you best.
Most mortgages are arranged on a repayment basis, also known as a Capital and Interest mortgage. This means that every month you repay a portion of the capital you have borrowed, as well as a part of the interest you owe.
By the end of the mortgage term, assuming that you’ve made all of your payments and not altered the original term/amount, you will have repaid the original amount you borrowed, plus interest, and you will own your home outright. You can opt for a shorter or longer mortgage term depending on how much you can afford to pay each month.
Some mortgages can be arranged on an interest-only basis. This means you repay the interest you owe each month, but not any of the capital you have borrowed. You only pay off the original amount you borrowed at the end of the mortgage term.
The advantage of an interest-only mortgage is that monthly payments will be much lower than with a repayment mortgage, but the downside is that you must be certain you’ll have saved up enough by the end of your mortgage term to repay the amount you borrowed.
To be eligible for an interest-only deal, you will need to be able to prove to the lender that you have got a savings plan in place to cover this.
3.Fixed Rate Mortgages.
As the name suggests, with a fixed-rate mortgage, you pay a fixed rate of interest for a set term, typically ranging from two to ten years, or sometimes even longer. This can provide valuable peace of mind, as your monthly mortgage payments will be the same every month, regardless of whether interest rates increase or decrease in the wider market. The downside is that if interest rates fall, you will be locked into your fixed-rate deal.
If you want to pay off your mortgage and switch to a new deal before your fixed rate comes to an end, there will usually be Early Repayment Charges (ERC’s) to pay – it may be that the new deal you find is significantly cheaper and even after the ERC it would make a saving to switch product.
After the fixed period finishes, you will normally move onto your lender’s Standard Variable Rate (SVR), which is likely to be more expensive. If your fixed-rate deal is coming to an end in the next few months, it is a good idea to start shopping around now and Journey Mortgages is well placed to help with this. Many lenders allow you to secure a new deal several months in advance, allowing you to switch across as soon as your current rate ends, and avoid moving to a higher SVR.
4.Variable Rate Mortgages
If you have a variable rate mortgage, this means that your monthly payments can go up or down over time. In addition to the SVR mentioned already, several other types of variable-rate mortgages are available, such as Tracker, Discounted Rate, or Capped mortgages.
Tracker mortgages, as the name suggests, track a nominated interest rate (usually the Bank of England base rate), plus a set percentage, for a certain period. When the base rate goes up, your mortgage rate will rise by the same amount, and if the base rate falls, your rate will go down. Some lenders set a minimum rate below which your interest rate will never drop (known as a collar rate) but there is usually no limit to how high it can go.
Discounted mortgages offer you a reduction from the lender’s Standard Variable Rate (SVR) for a certain period, typically two to five years. Mortgages with discounted rates can be some of the cheapest deals but, as they are linked to the SVR, your rate will go up and down when the SVR changes.
Capped rates can go up or down over time, but there is a limit above which your interest rate cannot rise, known as the cap. This can provide reassurance that your repayments will never exceed a certain level, but you can still benefit when rates go down.
There are many options to consider when choosing the most appropriate mortgage for your house purchase or move.
Journey Mortgages is perfectly placed to provide you with tailored advice to ensure you are not overpaying for your borrowing. Please do get in touch if you need any advice. We hope to hear from you soon!