Types of Mortgages

REPAYMENT / INTEREST ONLY MORTGAGES

Mortgage lenders agree a loan over a selected term to enable an individual to purchase a property. During the term of a mortgage, you as the borrower agree to pay a rate of interest on the full amount borrowed and agree to repay the capital borrowed by the end of the specific period of time.

As security against the loan, the mortgage lender usually takes a charge on the property being bought. This means the property cannot be sold unless the outstanding loan amount is repaid. It also means the property may be repossessed if you do not keep up repayments on your mortgage. The loan amount is usually a percentage of the value of the property being purchased, which is assessed by the lender’s surveyor.

BUY TO LET MORTGAGES

The popularity of buying additional properties as an investment continues to grow. According to the latest report by the Association of Residential Letting Agents (ARLA) almost 60% of buy-to-let investors are planning to buy another property in the next year. Most people buying to let will need specialist advice from an expert mortgage consultant.

Lenders generally require a minimum deposit of 25%, with the loan amount available primarily being based on the expected rental income for the property. Typically, a lender will require the rental income to be 145% of the monthly mortgage interest payments when calculated at a default stress test rate (usually 5% – 5.5%).

There are, however, products available which require a lower level of rental coverage. If you want to become a property investor and have sufficient equity in your existing property, a re-mortgage to raise the capital to cover the deposit, stamp duty, fees and costs is an option to consider.

FLEXIBLE MORTGAGES

A flexible mortgage adapts to suit your changing circumstances and has features such as;

• Overpayments without penalty
• Underpayments against overpayments
• Daily interest calculations (most lenders)

A more recent innovation is the Flexible Offset Mortgage. These mortgages generally have all the standard features of a flexible mortgage plus:

• Option to have linked current account
• Option to have linked savings account
• Any money in these accounts is offset against the mortgage, therefore reducing the interest payable.

The overall effect this can have on your total mortgage payment can be significant.

RE-MORTGAGES

This means replacing an existing mortgage with a new one from a different lender.

REASONS TO RE-MORTGAGE

• To obtain a more favourable interest rate and reduce monthly payments.
• To raise funds for home improvements, deposits on additional properties, a new car etc.
• Cheaper to extend than move? – You may find that it could be cheaper to re-mortgage and build an extension, rather than move home and incur costs such as estate agent fees, moving costs, stamp duty, etc.
• Debt consolidation – this may reduce monthly costs, but there are risks associated with this.
• Costs to Consider – you may incur an Early Repayment Charge with an existing lender, especially if you are in a fixed rate deal.

Some lenders charge a sealing / discharge fee for releasing the deeds.

There may be legal fees associated with re-mortgaging, typically £400 – £600 as well as valuation fees. Most lenders now offer incentives as part of their re-mortgage packages (such as free valuations and free legal services).

EQUITY RELEASE MORTGAGES

As you enter later life, you may want to release some of the equity in your home. This is a big step to take, so it is vital you seek financial advice. Equity Release schemes are becoming an important part of retirement planning. These schemes can be used to make your retirement more comfortable and to open up new and exciting possibilities. Our home/main residence is often the single largest asset that we own and releasing the value held in the property can assist in financing a range of needs for later in life, without the need to sell your home or borrow from other sources.

For example, as you get older, you may need to pay for long term care, adaptations to your home, or perhaps for more enjoyable things like a new car or a conservatory. However, once you have retired and do not have a regular income from employment, it is not easy to borrow money, or put savings to one side. Releasing the equity in your home can be the ideal solution.

The two main types of equity release product on the market today are:

Home Reversion Plans – You sell your home (or a share of it), in return for a lump sum or monthly income (or a combination of both). Technically you become a tenant living in your own home. When the property is sold (usually after your death); the Home Reversionary Company will be paid.

Lifetime Mortgages – You receive a lump sum or monthly income (or both) and pay nothing. The interest on that money is ‘rolled up’ into the loan. The amount borrowed plus the interest is repaid out of the proceeds from the sale of the property after you die.