Mortgage Best Buys

Mortgages Explained

Types of Mortgage Repayment Mortgage
Interest Only Mortgage
How Interest is charged Variable Rate Mortgages
Standard Variable Rate Mortgage
Discounted Rate Mortgage
Fixed Rate Mortgages
Capped Rate Mortgage
Cash Back Mortgage
Specialist Mortgages Buy-to-Let Mortgages
Flexible Mortgages
Offset Mortgages
Current Account Mortgages
Guarantor Mortgages
Self-Build Mortgages
Mortgage Features Overpayments
Underpayments / Payment Holidays
Borrowing Back
Daily Interest Calculations
Early Repayment Charges
Portability
Types of Survey Basic Valuation Report
Homebuyers Survey Report
Full Building / Structural Survey

Types of Mortgage

Repayment

With a repayment or capital and interest mortgage, you pay your lender a monthly sum, which is partly repayment of the outstanding debt and partly interest on the outstanding loan. Month by month the debt reduces.

Providing you make all your monthly payments in full and on time, the loan is guaranteed to be repaid at the end of the agreed term.

Interest Only Mortgages

As the name suggests you simply pay interest to the lender throughout the course of the loan. Your debt never reduces and at the end of the agreed mortgage term you should owe your lender exactly the same sum as at the outset.

Monthly payments to your lender are lower than for a repayment-type mortgage, but you will have to clear the debt at the end of the term.

In order to pay off your mortgage you will normally have to make payments into a separate investment plan, which is designed to build up sufficient funds to repay the loan in full. It is your responsibility to ensure that you have sufficient funds to repay your mortgage at the end of its term.

How is interest charged?

Whether you have a repayment or interest-only mortgage, you'll have to pay interest to the lender. There are a number of options:-

Variable Rate Mortgages

Some people take a mortgage with a variable rate - the rate goes up and down, usually in line with movements in the Bank of England base rates, which in turn affect the variable rate offered by the lender. Lenders choose when to change their variable rate. Some lenders offer a Bank of England Tracker over which the lender has no control when the underlying interest rate changes. Falling rates are good news, since monthly charges go down, but of course the reverse applies.

Standard Variable Rate Mortgage

Most lenders offer a simple variable rate mortgage, but this may not be charged at a competitive interest rate.

Pluses: -

Minuses: -

Discounted Rate Mortgage

Many lenders offer variable rates with an initial discount for a period of months or years. As a rule of thumb, the longer the discount period, the lower the discount.

Pluses: -

Minuses: -

Fixed Rate Mortgage

You can get a fixed interest rate mortgage, with a set interest rate for as short, medium and long terms (a number of people may choose to fix for between two to five years).

Fixed rates are good for budgeting, since you know exactly how much you will pay each month for a set period. They also provide protection, should variable rates rise during the fixed period. However, if variable rates drop below the fixed rate you could pay over the odds.

Most fixed rates have early repayment charges during the fixed term, and possibly after the fixed rate runs out. This is a charge, which is often equivalent to several months' interest, if you repay your mortgage before the end of the fixed rate period. In some cases, early repayment charges may apply for some years after the fixed period runs out.

Pluses: -

Minuses: -

Capped Rate Mortgage

Offers a combination of variable and fixed rates benefits. Great for budgeting as there is a ceiling to the interest rate that you will be charged for a period of years (the cap). But if the lender's variable rate falls below the capped rate your rate may follow taking advantage of reducing rates.

Some capped rates have a collar or floor, which is the minimum rate that will be charged for a period.

Pluses: -

Minuses: -

Cash Back Mortgage

Some lenders offer new borrowers a variable rate mortgage with a large cash back - a lump sum, which is normally a percentage of the loan, which is payable when the mortgage completes.

Pluses: -

Minuses: -

Specialist Mortgages

Buy-to-Let Mortgages

Buy to Let Mortgages are mortgages specifically designed for people who want to invest in the property market by purchasing one or more houses and letting them out to tenants. The investor is then able to benefit from any appreciation of the capital value of the house itself. Please be aware that the value of properties can fall as well as rise. The revenue generated from letting the house can meet much of the mortgage loan repayments.

Buy to Let mortgages differ slightly from the normal residential type in that rental revenue can be considered as income when taking into consideration the ability of the borrower to meet the ongoing mortgage repayments. Rates and set up fees for Buy to Let mortgages can be slightly higher than normal residential property rates. It is absolutely essential therefore to have access to the a comprehensive market for buy to let mortgages to ensure you receive the best deals available.

Your gr8 advisor will also discuss all the general pros and cons involved with buying to let. For the more seasoned investor we can also discuss the opportunities attached to 'portfolio' borrowing and portfolio insurance deals, which are often bespoke to gr8 Mortgage Solutions.

Flexible Mortgages

A flexible mortgage allows scope to change your monthly mortgage repayments to suit your available budgets. Many people choose to overpay and in doing so repay their loans more quickly.

Most mortgages are flexible in some ways although you should always check with your gr8 advisor that it has the features should this form part of your requirements.

Offset Mortgages

An offset mortgage has an associated current account or savings account attached to the main loan. This is usually, but not always, held with the mortgage lender. Each month a calculation is made to account for the offset account balances. An allowance is given to either, reduce the monthly mortgage repayments, or alternatively reduce the capital amount outstanding on the mortgage itself.

For example, if you had a £100,000 mortgage with an offset savings balance of say £25,000 then you will be required to pay mortgage interest on only £75,000.

This can be tax-efficient if you pay tax on your savings because technically you don't earn interest (you offset instead) and therefore you do not pay the tax associated with it.

Current Account Mortgages

A current account mortgage is similar to an offset mortgage in that it 'offsets' the balance of your current account against the mortgage loan. However, unlike the offset type mortgage with a loan and savings account, the current account mortgage is combined into one. This means that the account operates just like an overdraft, albeit a large one.

The mortgage lender will draw up a plan that includes the minimum amount that you should leave in your account each month to repay your mortgage over the agreed term. If you leave more than this in your account then you will pay less interest and effectively head towards repaying your mortgage early. The opposite applies if you leave less.

Guarantor Mortgages

Guarantor mortgages allow First Time Buyers to borrow more than standard income multiples would allow by using a guarantor. The guarantor usually has to be a parent or legal guardian, and most but not all, will allow for just one single guarantor.

Guarantor mortgages basically allow for a proportion of the guarantors income to be used, in addition to that of the mortgage applicant, in order to borrow more than would otherwise be allowed. The guarantor's legal position is often quite complicated and it is therefore advisable to seek independent legal advice.

Self-Build Mortgages

The main difference between a self build mortgage and a house purchase mortgage is that with a self build mortgage money is released in stages as the build progresses rather than as a single amount.

Some lenders will lend you money to purchase land, typically 75% of the purchase price or value, whichever is lowest. After this, the money for the build is released in a series of stages. These can be fixed or flexible depending on the lender but usually there are five.

During the build you can borrow typically 75% of the cost of the value of the house as the project progresses, depending on the chosen lender.

Mortgages Features

Overpayments

If you can afford to pay more than the normal monthly mortgage repayment, or pay off a lump sum, then this can have a beneficial impact to your mortgage loan. Remember to check with your gr8 advisor before doing this however as some lender will have restrictions on the amount and frequency of repayments.

Benefits include a potential to either lower your monthly mortgage repayments or, should you continue to pay at the usual rate, then the mortgage may be repaid more quickly.

To get the benefit of overpayments you must choose a lender that charges interest daily or monthly.

Underpayments and Payment Holidays

As your circumstances change it might mean that for a temporary period of time that you need to lower your mortgage commitments. Here you are permitted to pay less than the usual monthly mortgage repayments for a given period, say 6 or 12 months. You might even be allowed to suspend mortgage repayments altogether with permission.

Most lenders would require you to have built up some overpayments in advance of this. During any period of underpayment or payment holiday, interest continues to accrue and is added to the amount outstanding on your mortgage. This effectively means that you will have to pay higher repayments in the future to get back on track.

Borrowing Back

Your lender may give you a pre-approved level of borrowing from the outset. This means that should you require to borrow more in future, then you do not need to get further approval for this to happen. Alternatively, you might be able to borrow back any previous overpayments without approval. With traditional mortgages, further borrowing will typically take longer as you would need to apply for a top-up.

Daily Interest Calculations

This is a relatively important feature to look for in any mortgage. Interest is normally calculated daily which means that any payments or overpayments are credited to your mortgage loan the day they are received. Some lenders apply payments monthly and annually which means that effectively you pay more interest.

Early Repayment Charges

If you have chosen a mortgage deal it may be that it comes with ties or restrictions. Some lenders will levy a charge for full or partial repayment if it falls within a certain period. This is typically during a fixed or discounted rate period.

Taking account of your needs and future circumstances will alleviate most of the problems associated with these fees, however you should refer to your gr8 advisor for advice in these matters.

Portability

To avoid early repayment charges in the event that you move home it is important to ensure that your chosen mortgage deal allows for the rate to be ported.

As long as you borrow as much for your new house purchase, you can transfer your interest rate across and avoid a penalty. If you require borrowing in excess of this then it is usual that the lender will offer a 'top-up' rate from their current lending portfolio.

Types of Survey

As a condition of your mortgage the lender will normally carry out a valuation or survey to ensure that your property is suitable for lending purposes. There are usually 3 types of survey available. (We are however unable to offer advice on the suitability of the survey type you choose).

Basic Valuation Report

This is a limited inspection for mortgage purposes only. The valuer completes a report for the lender and recommends whether the property is suitable as security for the mortgage advance. If the report highlights any areas for concern they may ask the borrower to carry out essential repairs or even hold back some of the money, this is called a retention, until such repairs are complete.

Homebuyers Report

This is a more in depth report where clients want more than the basic valuation report. Again, this is limited in its focus but may, by the nature of time spent at the property, identify more faults.

Full Building / Structural Survey

This is a full and comprehensive inspection of the property. This is the most expensive option and is carried out by a professionally qualified person. If the property is defective, then this should be discovered as part of the full survey.

Your property may be repossessed if you do not keep up repayments on your mortgage.

A typical fee of £395 is charged for our Mortgage Advisory Services.

The FCA does not regulate some forms of Buy to Let mortgages.

gr8 Mortgage Solutions is a trading style of Ferris Financial Solutions Limited. Ferris Financial Solutions Limited is an appointed representative of Sesame Limited, which is authorised and regulated by the Financial Conduct Authority. Sesame is entered on the FCA register (www.fca.org.uk/register/) under reference 150427.