Mortgage- Types and FAQs
If you’re reading this, it’s likely that you’re a first-time home buyer. The decision of buying a house is not a simple one. A house is a long-term investment and bought only after minutely considering your financial circumstances. As you may be a beginner in the process of buying your own home in the UK, it’s likely that the time and effort involved will overwhelm you. Many people in the UK find that they need to take out a mortgage to finance their new home. This is a common thing. Before signing a deal, however, it is advisable to use a mortgage calculator to check how much you can afford to buy.
Mortgage- What does this mean?
A mortgage is a loan that you take out from a lender like a bank or finance company for your new home. It’s given for a particular number of years, typically ranging from 25 to 30 years. Shorter loan periods are also available if you don’t wish to stretch repayments over a long number of years. Remember that you can use funds from a home loan only for the purchase of a property.
Another thing to remember is that lenders only give out mortgage loans against the property you want to buy. It’s a secured loan that means the lender takes a low level of risk when they approve your mortgage application. If you fail to manage the monthly repayments, you might have to sell off your house to repay the loan. Thus, you should be very clear about whether you’ll be able to afford the repayments during the entire term of the loan as mortgage can prove risky.
Types of Mortgages
Mortgages don’t have a standard rate or capital amount. As different people have different circumstances, the money they want to borrow and the interest rate they can afford vary. Lenders understand this and offer customized deals to every applicant. That means, another home loan applicant you know may have a better deal as compared to you.
In interest-only home loans, you pay just the interest every month. You don’t repay the capital during the term but at the end of the term. Those who want to reduce their monthly expenses can go for this. Yet, you need to have confidence that by the end of 30 years, you’ll have saved enough to repay the capital in lump sum. It may also be the case that you’re sure of a huge inheritance that will help pay off the loan. Lenders usually insist on knowing how you plan to repay the loan.
In fixed-rate home loans, the interest rate you and the lender agreed to at the outset remains the same. That is, no matter whether mortgage interest rates go up or down, it has no effect on your deal. You’ll pay the same interest rate for a fixed number of years. The first-time home buyers who want to stick to their monthly budget and want to be sure of their monthly repayments should go for this type of mortgage. Suppose you chose a 4% interest rate, you’ll pay 4% even if the rate goes up to 6% or comes down to 2%.
- 95% :
How much you want to borrow depends on how much deposit you pay from your own pocket. The less money you’re willing to put up as deposit, the more you’ll have to borrow from a lender. A 95% mortgage deal is for buyers who have a miniscule amount of deposit, that is just 5% of the total value of the property. Suppose a property’s value at £400,000 and you have only £20,000 as savings, this means that you’ll have to look for a lender offering a 95% deal. Such deals are hard to find as you must have at least have a deposit of 20%.
A flexible deal gives buyers the much sought after flexibility in repayments. When you have more money in your bank account, you can repay a higher amount than what you owe. In the same way, when you’re short on money, you can take a repayment holiday for a few months. Like a thing too good to be true, this deal also comes at a higher interest rate than others.
- Buy to let:
Assume the house you’re now living in is already yours. You have some extra money and you want to invest in real estate. But this amount does not cover the entire price of the house. The second house you’ll lease out to tenants and earn rental income from it every month. In such a case, the best deal for you is a buy to let mortgage. It’s seen as a business transaction as you’re buying property for earning income thereon. Hence, you should prepare yourself for higher rates and fees than a residential mortgage. The LTV (Loan to Value) which determines how much percentage of the value of the property you can borrow is also high, typically 85%. This means you need to have a deposit of 15%.
A tracker deal is in sync with the Bank of England rates. As the Bank’s base rate goes up, your lender will also raise your interest rate after adding a few percent to it. Likewise, if the Bank’s base rate fall, your lender will also cut down on your interest rate. Usually, the rate you pay will be one or two percent above or below the base rate. Lenders also set a minimum rate below which their rate will never fall. So there can never be a situation in which you pay 0% interest.
- Discount rate:
Whenever you sign a home loan deal, you’ll probably have a fixed interest rate for the first 5 years. Then once this period is over, you’ll shift to the lender’s SVR (Standard Variable Rate) where rates change all the time. With a discounted rate mortgage, you’ll get a discount over and above the SVR and this lasts for 2 to 5 years.
- Capped rate:
With a capped rate mortgage, there will be a cap on how far the interest rates can rise. This is like a precaution in times when the interest rates go on rising. Borrowers get peace of mind as they know that their payments won’t exceed a certain limit.
You get a lump sum when your mortgage begins. This lump sum may be a fixed amount offered by the lender or a percentage of your loan. It’s a marketing incentive and is seen infrequently nowadays. It’s helpful to home buyers who want to renovate their bedroom or kitchen.
An offset mortgage is also called current account mortgage. It uses the money you have in your savings account to help you pay less monthly mortgage payments. Suppose, you took out a home loan for £ 150,000 and your savings account has a total of £50,000, then your interest will be calculated on the net balance which is the difference between the two. The great thing about this is that you have instant access to savings, at the same time saving on your monthly mortgage payments. Essentially, savings ‘offset’ your mortgage. This type is beneficial anytime, not just when interest rates are low.
- I’m 28, have my own business and not yet married. Can I get a mortgage?
It’s commonly believed that you need to be working in an office in order to successfully get a home loan approval. This is false. Even a self-employed person can get a mortgage provided you show your three years’ financial statements. If you have just two years’ statements, your chances are still 80-90%. The criteria a lender looks for is your ability to repay. If your net profit allows you to afford a home loan, that’s great. The deposit remains the same for a bachelor or family person.
- My friend and I are interested in the same property. Can we pool our funds together and buy it?
Yes, if you both have good credit scores and enough deposit and income, there should be no problem. However, complications may arise as to how much ownership each person has in the property and if either of you can’t afford to pay for the property. In a joint tenancy, your share passes to your friend when you die. You should seek professional advice from an independent solicitor.
- HELP! I earn around £25,000 a year. Will I be eligible for a mortgage?
Yes. Your expenses and affordability are taken into consideration during approval. You should get in touch with a mortgage broker who will work out your finances and suggest the best deal.
- I’m currently unemployed due to a health condition. My only income is from my health insurance. Can I get a mortgage?
Unfortunately, no. Permanent Health Insurance (PHI) is not considered as a source of income in a mortgage application.
What Is a Remortgage?