Mortgages

This refers to a mortgage loan with a fixed interest rate for the duration of the loan that will be unaffected by my market conditions. This gives borrowers predictability throughout their loan agreement, making it a popular choice among borrowers.

The interest rate can be fixed for up to 15 years, though this is rare, and the longer the period lasts, the higher the interest rate is, as this protects the lender against unfavourable changes in the market.

Fixed-rate mortgages usually incur an up-front fee and entail early repayment charges.

At the end of your agreed mortgage period, your lender will change your interest rate to an SVR (standard variable interest rate) which is typically significantly more expensive than your previous interest rate, so it’s important to remortgage before you are transferred to the SVR.

Acquiring a loan with poor credit history can be difficult but not impossible. There is no set credit score that lenders use to approve a mortgage; instead, they will assess your credit performance on a case-by-case basis and assign their score.

A bad credit mortgage usually has fixed terms and higher monthly repayments with an LTV value of 75% or lower, meaning it can cover up to 75% of the property cost, so you will need at least 25% of the property’s value in cash.

These are a good option if you want to get on the property ladder sooner, but it may be worth improving your financial situation to have a wider selection of loans to choose from so you can get a better interest rate with more freedom of choice.

When you move house, you can ‘port’ your mortgage over to your new property, which would be desirable if your current rate is agreeable, then you need to pay off your existing mortgage and then take out a second for the new property.

The benefit of a new mortgage, as opposed to porting it over, is that you may be able to get a more competitive deal if market interest rates have fallen. However, you will need to consider the cost of early repayment charges and other costs to end your current deal. This is worth factoring in when choosing which would be the most cost-effective.

A bank’s SVR is influenced by the Bank of England’s base rate but is not tied to it. At the end of your fixed-rate mortgage term, you will be put on the SVR.

The SVR can be expensive, sometimes twice as much as the interest rate in your original plan. A discounted variable mortgage will track the bank’s SVR and remain at a fixed discounted rate below the SVR for a set term.

For example, if the bank’s SVR is 5%, and your discount is 1%, your rate will be 4%. If the bank raises or lowers its SVR, your discount of 1% will match the updated rate.

This kind of mortgage can offer competitive interest rates if your bank lowers their rates in line with Bank Of England rates, and they often have lower early repayment fees than a fixed-rate mortgage.

With a repayment mortgage, your monthly repayment covers a chunk of the capital borrowed as well as the monthly interest. This means if you meet all monthly repayments, you will have paid off the entirety of your loan. The mortgage term of a repayment loan is generally around 25 years.

With interest-only mortgages, you will only repay the interest part of your loan during the loan term and pay off all of the capital at the end, which you will need to pay in one lump sum. They are generally only available for buy-to-let borrowers.

These are only advisable if you have a separate finance plan, referred to as a ‘repayment vehicle’, to cover the cost of the final payment once it comes around. This could be something like investments in stocks or rent garnered from leasing a property, otherwise, there is a risk involved if you have no security in paying off the loan once the term is complete.

Furthermore, as you’re only paying off the interest and not making a dent in the capital cost, there will be no reduction in payments as the capital owed remains the same up until the end of the agreement, at which time you’ll pay it off all at once.

Similar to an SVR loan, a tracker loan’s interest rate takes its lead from the Bank of England’s base rate. So when the BoE’s base rises by 1%, so too does your rate.

This also applies to decreases. The B0E’s Monetary Policy Committee convene eight times a year to vote on what the rate should be, meaning a high potential for variability in your interest rate.

Tracker mortgages often come with a collar, also known as a floor, meaning that in the event of a dramatic base rate fall, your rate will never go lower than the mortgage collar. Some trackers have the opposite, known as a cap, which means your rate will never go above the agreed limit. These tend to have higher initial rates due to the security afforded by the cap.

At the end of the tracker’s term, often around two years, your rate will revert to the lender’s SVR.

An SVR loan, also known as a reversion-rate mortgage, is similar to a tracker loan, except that instead of tracking the Bank of England rates, the bank sets its rate based loosely on the BoE rate.

Fixed, tracker, and discount agreements will transfer over to the SVR once the initial term is completed if you don’t remortgage. An SVR is typically much higher than a fixed rate; according to Moneyfacts, the average SVR was 4.9% in 2019, compared to a 2.52% average on fixed-rate mortgages.

With an offset mortgage, your savings account is linked to your mortgage, and the value of your savings is deducted from the total mortgage balance, lowering your monthly payments.

So if you have £50,000 in savings and a mortgage of £200,000, you’ll only pay interest on £150,000.

While you won’t earn interest on your savings anymore, you’ll find that while you usually pay more interest on your mortgage than you earn from savings, an offset mortgage can still help you save money in loan repayments.

You can still access the funds in your savings, but as they are depleted, the amount of money you used to offset the loan will reduce and drive your repayments up.

In the case of a guarantor mortgage, you will get someone else to use their home as collateral on your loan. They can also put a lump sum of their savings into a savings account held by your lender, which they will be unable to withdraw until you have paid off an agreed amount of your loan.

The guarantor generally needs to be a close family member, own their property, have a good credit record, and earn a high enough income to cover your repayments.

The guarantor will have no legal right to your property however, this is simply to finalise the loan. In some cases, the guarantor will be responsible for 100% of the mortgage; in others, mortgage lenders will make them responsible only for a percentage of the property value.

If you fail to make up your monthly repayments, the guarantor will step in to cover them. If they are unable to pay what’s owed, their home will be assumed as collateral.

Under a joint mortgage, you and your fellow mortgagor will be jointly responsible for meeting loan repayments. Married and unmarried couples can both get a mortgage together, as well as a friend, family member, or business partner.

This is a popular choice for parents helping their children get on the property ladder, and many lenders will accept a joint mortgage between a borrower and a parent.

A benefit of a joint mortgage is that with two borrowers, lenders will often advance you more money as they have two sets of incomes to offset against the mortgage.