Mortgages
From first-time buyers to buy-to-let property investors, we'll help you find the most competitive mortgage rates and terms.
Understanding Mortgages
Mortgages are one of the largest single transactions in most people's lives. Buying a property can be a stressful and time-consuming experience; nowadays the financing of a mortgage is a case of finding and selecting the most suitable mortgage, rather than simply accepting a lender's offer.
Banks, building societies and smaller niche lenders compete for your business, all offering a variety of interest rate deals, associated fees and other enhancements to attract borrowers.
The two main methods of repaying a mortgage are repayment (capital and interest) and interest only. It is also sometimes possible to set this up using a combination of the two. A description of these methods is provided below.
Repayment Methods
Repayment (capital and interest) method
Under the repayment method your monthly repayments consist of both interest and capital and, over time, the amount of money you actually owe will decrease. In the early years, your repayments will be mainly interest, so the capital outstanding will reduce slowly at the start of the mortgage.
This method ensures that your mortgage is repaid at the end of the term, providing all payments are made on time and in full.
Interest-only method
As the name suggests, you will only pay the interest on the amount borrowed and none of the capital, so the capital is still outstanding at the end of the term. Therefore you will usually need to take out some kind of investment policy to save up enough money to repay the mortgage at the end of the term.
Traditionally, the preferred product for repaying the capital of an interest-only mortgage was a mortgage endowment policy (which included a set amount of life cover). Customers now tend to use Individual Savings Accounts (ISAs) and pensions to build up a sufficient sum and to take advantage of the tax breaks offered by these products.
Mortgage Products
There are several terms used to describe the interest rates you pay on a mortgage, and the key terms are as follows:
Standard Variable Rate (SVR)
The SVR is the lender's standard rate. With a variable rate mortgage you are normally able to switch lenders at any time without being penalised. If you take out a mortgage that has a fixed, tracker or discounted rate, once the set period of time ends the loan will usually revert to the lender's SVR.
Fixed Rate
A fixed rate mortgage allows you to repay interest at a set rate, irrespective of any interest rate fluctuations. In other words, your monthly repayments will remain the same every month for a time period agreed between you and your lender.
Tracker
A tracker mortgage usually tracks for a set period any movement in an index specified by the lender; this for example could be the Bank of England Base Rate. You will benefit from any falls in the specified interest rates, but will also have to pay more each month should the rate increase.
Discount
The discount mortgage rate is another variation of the standard variable rate. It provides a discount from the lender's SVR for a set period of time. The variable interest rate still fluctuates, meaning your monthly repayments may differ slightly from month to month, but the discount remains constant.
Fixed, Tracker and Discount rate mortgages often have early repayment charges so you need to be sure this is suitable for you for the foreseeable future. Furthermore, the lender may also charge a 'booking/arrangement fee' to apply for these types of mortgage. You should ask your adviser to explain these in more detail, or ask for an illustration.
Specialist Mortgages
Bad Credit Mortgages
Although getting a mortgage with bad credit can be difficult – especially if you have defaults, individual voluntary arrangements (IVAs), county court judgments (CCJs), or a bankruptcy in your credit history – it is possible.
All lenders will conduct a credit check on anyone applying for a mortgage. Many high-street banks may refuse to offer a mortgage if you have a bad credit history, but there are specialist bad-credit mortgage lenders who will be more flexible when assessing your mortgage application. However, the mortgage offered may mean you need to put down a larger deposit and be prepared to pay higher-than-average interest rates.
Alternatively, you may want to consider trying to improve your credit score before applying for a mortgage, in order to increase your chances of being accepted for a standard mortgage.
It pays to be cautious about applying for a mortgage if you think you might be rejected. This is because every time you apply for credit it is likely to be recorded on your credit history and unsuccessful applications can bring down your credit score.
Ltd Company Buy-to-let
Many landlords now operate as a limited company for the purposes of buy-to-let (BTL). Operating in this way will have some financial benefits but is likely to restrict the choice of mortgages available.
With a reduced range of products, you need to choose the mortgage that is best for you. This isn't just a question of opting for the lowest interest rate and cheapest monthly repayments. Like residential mortgages, buy-to-let mortgages need to be compared in terms of any extra fees that may be applicable, as well as additional benefits they offer.
Consulting an experienced, impartial mortgage adviser is advisable as they can provide expert advice on which product is best for your needs.
Portfolio Buy-to-Let
If you are a landlord letting out more than four properties, lenders will consider you to be a 'portfolio landlord'.
New affordability rules were introduced in 2017, which mean that portfolio landlords need to meet specific affordability rules for all properties they own, rather than the overall affordability of their portfolio, when applying for new finance.
However, some lenders use a method called 'top-slicing' when assessing your application. This allows the lender to take into account any additional income you have, apart from rental income, when they calculate what they are willing to lend you. Top-slicing is unlikely to be appropriate if you have little in the way of disposable income or savings and therefore do not have income to cover unforeseen events.
If you are already a portfolio landlord or you are aiming to grow your property portfolio, you could consider a portfolio mortgage which allows you to have the whole portfolio under one mortgage.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.
The information within this article is purely for information purposes only and does not constitute individual advice.
A Buy-to-Let mortgage will be secured against your property. The Financial Conduct Authority does not regulate some forms of Buy-to-Let mortgages.
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