Finding the best mortgage that meets your needs is vital if you are looking to succeed in your entry into the market for property. The issue is, where do you begin? If you don’t have any knowledge of the various types of mortgages and what they are it is likely to make you a bit confused.
While all have the same goal (i.e. providing you with money to purchase property at a certain rate of interest which you’ll have to repay over a period of time) There are many kinds of mortgages Northern Ireland that are available. They include:
Repayment
Interest-only
Fixed
Variable
Tracker
Capped
First-time buyers
The High Percentile (i.e. mortgages with 95 or 100%)
Discount
Offset
Flexible
Cashback
Buy-to-let
The issue is, what does each one mean? While some are pretty straightforward while others are unclear and ambiguous. It’s the perfect time to shed some information about the various kinds of mortgages UK buyers can select from!
Repayment
Let’s begin with the most well-known of all: repayment mortgages. Repayment mortgages form the basis for the majority of mortgages available in the market no matter what their extravagant names or terms.
The principle is straightforward: you get an loan from an institution and then repay it over time that could be anything between 40 and 40 years in the current market but is more often between 20-30 years. Each month’s repayment will cover some of the capital loaned as well as a portion of the interest associated with the loan. When the period you have set has been completed, the loan will be fully paid and the property will become yours.
Naturally, when discussing such lengthy periods in time, the probability is that you’ll be looking to move before the period expires in which case obviously possible. There are two options to consider: you could transfer to the new home (take your mortgage to the new location) or pay off the remainder and begin anew with a new mortgage for the new home.
Interest-only
The interest-only type of mortgage is, if you can think of a better way to calling them, the least interesting one on our list. Although, as we’ve mentioned previously the majority of mortgages operate on the basis of a repayment principal however, interest-only mortgages work differently.
Like the name implies, interest-only loans are based in the same way, namely paying the interest due on the mortgage every month. This is a wonderful idea when you discover how much you’ll be required to pay each month but you’ll still have to pay for the loan’s capital after the loan period is over. This means that you must be sure that you be able to pay back the loan when the loan term expires or else you may be ordered to sell your home.
The majority of buyers who take advantage of interest-only mortgages choose high-interest savings accounts with fixed rates that secure their money to make sure they have enough funds to cover the mortgage at the time However, others have been more inventive during the last few years. But, it’s important to keep on your mind that loan providers could inquire about what you intend to do to pay back the money borrowed prior to committing the cash, so keep this in mind when making contact with a bank or building society to get this kind of loan.
Fixed rate
The most popular choice for first-time buyers and all those during periods of uncertain times (hello Brexit! ) This is a fixed-rate mortgage. It is also type of mortgage that fulfills exactly what it states on the label, namely that the interest rate is fixed for a specified amount of time. The timeframe could range between two years at the bottom and into 10 years or more in certain cases.
The advantage of an interest-only loan is that you are aware of exactly where you stand during the length of the fixed time. No matter what transpires elsewhere, your payments will be the same every month until the period is over. After the term is completed, the mortgage will be converted to the lenders standard variable rate (SVR) which means you’ll be able to change lenders or request a fixed rate with the current provider if you decide to move to another one.
Of course, there’s a negative side also. If mortgage rates fall in the future, you’ll have to pay on your mortgage at a higher rate, while other people are able to enjoy a reduction in their monthly installments. In addition, you’ll be obligated for the entire period, which means that if you choose to pay off, change or end the loan before the specified timeframe has expired, you’ll be required make a payment for an early-payment fee which will be determined at the time you sign the contract.
Variable rate
As we’ve mentioned the lenders will have an average variable rate that they base their other products on the same variable rate that the fixed-rate mortgage will return to once the fixed time is over. In essence, this will be the lender’s primary mortgage.
The term “variable” refers for the amount of interest you pay on the amount you loan and can fluctuate up and down. Mortgages with variable rates are dependent on the BoE’s base rate, however they are subordinate to the lenders’ requirements as well. This means your rate may increase regardless of whether the BoE’s rate stays the same.
Trackers
The tracker mortgages, in contrast to SVRs which follow a specified interest rate, which is set by an amount, either higher or below the rates of interest. The rate they typically follow is the Base rate of the Bank of Britain and, when you are a member of the BoE decides to increase prices, the mortgage’s repayments will be affected and vice versa in the event that they decide to cut them off.
A aspect to consider when using trackers is the lender’s requirements for the lower portion of their base rate. A lot of trackers will state that the loan can’t fall below a specific rate, no matter what the BoE decides, while stating that there’s no cap at the top portion. It means that their loan is secured by a minimum profit margin, however there is no guarantee of your monthly payments rising to the ceiling.
Capped rate
If the final sentence of the preceding paragraph has brought you the dreadful experience and a fixed rate mortgage could work better for you. These loans are capped in that the rate of interest will never go over the specified amount when you apply for the loan, however you can still reap the benefits should the rate decrease.
Capped rate mortgages are however, extremely difficult to come across currently.
First-time buyers
Although first-time buyers are allowed to select any mortgage listed in this listing (with an obvious exclusion of Buy-to-let) Some lenders might provide special offers only to those seeking to get onto an investment ladder first.
The mortgages are often linked to government programs such as Help to Buy.
High percentile
Also called 95 percent or 100 percent mortgages, high percentage loans are provided to people who are unable to put up a substantial investment to buy a house. They were virtually eliminated after the 2007 financial crisis, however they are beginning to enter the market again. In the wake of the launch of Help to Buy in 2013 also offers those struggling to come up with the typical 10 per cent minimum deposit to start their journey on the ladder, however it’s not free of risk.
Lending on these short-term margins exposes the borrower to the potential of negative equity. Without a cushion like a substantial deposit, house prices will only fall by a tiny amount, and the mortgage could be a lot more than what is worth of the house that it is lent to. The result of this risk usually means that lenders increase prices to cover their risks, resulting in monthly payments hefty in the process.
Although those who struggle to come up with a loan may think of these loans as a great method to get their first house but they should take note of risks that come with going through this process before putting on the contract.
Discount rate
The mortgages with a discount rate are provided at a lower rate than the standard variable rate (SVR) to a specific amount. They are great when they have a stable SVR, if there is volatility in the market for lending, they can be a tizzy ride because rates can rise and down.
As one might think, lenders usually limit the terms of these loans to a certain period typically ranging from two and five years.
Offset
Offset mortgages may not be the most sought-after loan type in our list, but they could suit a specific segment better than others. They are ideal for people with adequate savings and fall in the tax band with the highest rates offset mortgages work in a distinctive way which combines your savings and mortgage together.
In essence, with the offset loan, you’ll be charged interest on the difference in the mortgage amount and savings. Thus, for instance an individual with PS25,000 in savings and a mortgage of PS200,000 in savings would only pay an interest rate of PS175,000. This is calculated month-to-month.
Although your savings will be available, eating into the savings that you have will decrease the amount you offset by, thereby increasing the term of your mortgage. Savings won’t earn interest if they’re utilized to offset your mortgage, however that there’s no tax to pay, which is the reason that those who are who fall into the tax band with the highest rate might find this type of loan appealing.
Flexible (or flexible)
Flexible mortgages are typically sought for those who do not have an income that is steady from month-to-month like those who work for themselves, for instance. The name itself suggests that flexible, or flexi mortgages let you pay less or more each month, and some allowing you to skip payments completely in certain months in the event that circumstances become challenging.
The disadvantage? Flexible mortgages are typically provided at a higher cost of borrowing by the lenders.
Cashback
Cashback was popularized in the late 90s, in the 90s when card issuers began to offer cashback on purchases as an incentive to encourage consumers into opting for their products over other cards. Cashback mortgages operate in the same way. You’ll receive a specific amount on your loan, typically in the form of a percentage, when you decide to choose a particular product over other.
Cashbacks can amount to quite a substantial amount when you’re talking about loans in the many thousands of pounds however it’s not free money. Be sure to check the interest rate you’re paying for and read the small print prior to signing to a contract – you’ll find better rates if you consider all the factors.
Buy-to-let
Our final choice of different kinds of mortgages available in the UK is the buy-to-let.
Buy-to-let mortgages are available to those looking to purchase a home to rent the property out instead of living there. The calculation involved with a buy-tolet mortgage differ from those mentioned previously mentioned because the lender will typically consider the amount of rent that the property is expected to generate in determining how much they will give.
It’s all the 13 mortgage types explained! I hope that you have an understanding of UK mortgage kinds, but if require any assistance with any aspect of property, simply contact us or drop us a message. We’re always here to assist.