It is always a good idea to understand the different types of mortgages that are available and how they work. In this article, we take the first steps in finding out which type of mortgage is best for you. Each mortgage has its advantages and drawbacks. To help you get informed about what is on offer, this is our brief guide to the various types of mortgage available-
Fixed-rate mortgages
These are the most common types of mortgage. According to “Which?”, six out of 10 mortgage customers have a fixed-rate deal.
With this type of mortgage, you pay the same interest rate for the entire deal, regardless of interest rate changes elsewhere.
The two most common lengths of deals are two and five years. In most cases, you will be moved on to your lender’s standard variable rate when you reach the end of your fixed term. Most lenders will offer a follow-on fixed rate and our mortgage adviser can help you with this nearer the time.
Whether a fixed-rate or variable-rate deal is best for you depends on a few factors. The most important things to consider are-
- Do you think your income will change?
- Whether you want to know exactly how much you will pay each month
- Whether you could cope if your monthly payments went up
Variable-rate mortgages
A variable-rate means that the rate of interest you pay back on your mortgage is liable to change. Tracker mortgages and discount mortgages are the two main types of variable-rate mortgages.
Tracker mortgages
This kind of mortgage tracks the Bank of England’s base rate. For instance, if the base rate was 1% and the additional rate is 3%, you will pay 4%.
Typically, you take out this kind of mortgage as an introductory deal period – for instance, for the first two years – before being moved on to your lender’s standard rate.
There are a few mortgages with ‘lifetime’ trackers, but these are uncommon. In this case, your rate will track the Bank of England base rate for the whole mortgage term.
Approximately one in 10 mortgage customers have a tracker mortgage according to research by Which?
Discount mortgages
With this type of mortgage, you pay your lender’s standard variable rate, with a fixed amount discounted. In case you did not know, the term “standard variable rate” refers to a rate chosen by your lender that does not change very often, with a fixed amount discounted. More about these later in this guide.
If your lender’s standard rate was 4% and your mortgage came with a 1% discount, you would pay 3%.
Sometimes discounted deals are “stepped”. This would mean that you might take out a five-year deal and pay a lower rate for a year and then a higher rate for the final four years.
Collars and Caps
What do shirts and variable rates have in common? Well, they have a “collar”. This “collar” refers to a rate below which they cannot fall, while others may be capped at a rate they cannot go above. You must pay attention to these features when choosing your deal. Not all variable rate deals have a collar.
Collars and caps apply to tracker mortgages as well as variable-rate mortgages.
Standard variable rate mortgages
We mentioned standard variable rates earlier. Each lender can set this figure at whatever level it wants and it bears no relationship to the Bank of England base rate.
Although they normally do not change often, lenders can change their standard variable rate at any time. Certain factors influence these changes. For example, they are more likely to change if there are rumours of the Bank of England changing the base rate soon.
Most people who have a standard variable mortgage have had their mortgages for over five years. However, your mortgage adviser should keep in touch at least once a year to ensure that you are getting the best mortgage rate for your circumstances.
Offset mortgages
An offset mortgage is where you have savings and a mortgage with the same lender and your cash savings are used to reduce the amount of mortgage interest you are charged. Rather than placing your money in a standard savings account, you place it in an offset account linked to your mortgage.
The bank offsets the total balances of your linked accounts against the amount you owe on the mortgage each month and then works out your mortgage interest on the lowered balance. When you have an offset mortgage, you do not receive interest on the linked accounts.
If you had a mortgage balance of £100,000 and offset £20,000 in savings, you will only be charged interest on £80,000.
Specialist mortgages
Sometimes your circumstances make it harder for you to secure a mortgage or you might need some help getting on the property ladder. This might mean that a specialist mortgage is your best option.
Mortgages with a gifted deposit
More and more first-time buyers are using gifted deposits to get a mortgage. However, if you are relying on a gift, you will need to be aware of the implications.
Gifted deposits need to be a gift and not a loan. In some cases, lenders will ask for proof from the “gifter” that the amount is a gift and that they do not expect repayment.
Different lenders have different rules surrounding gifted deposits. We can advise you on the particularities of using a gifted deposit.
It is important to remember that if the person gifting you the money dies within seven years, you may need to pay inheritance tax.
Joint Borrower, Sole Proprietor (JBSP)
JBSP mortgages are a type of mortgage where not all parties to the mortgage are the legal owners of the property. For instance, if there are two borrowers in this scenario, both will be liable for the mortgage but only one will be named on the title of the property.
These mortgages allow parents, guardians, friends, or family to support would-be first-time buyers with the affordability challenge of getting on the housing ladder.
Mortgage for a Concessionary purchase
A concessionary purchase is a term for a property that is bought for less than its market value and, as you can probably guess, concessionary mortgages can be used to buy a property that is sold at a discount.
Some concessionary mortgages are easier to get than others. Mortgages involving family members are much easier to get than if a buyer was purchasing from a private seller.
Here is an example of how concessionary mortgages work. Imagine your parents want to help you onto the property ladder. To do so, they offer to sell you a property they own at a discounted price.
Let us say that this property is worth £150,000 but your parents want to sell it to you for a discounted price of £120,000. The surplus of £30,000 would then act as your deposit. Most lenders still require you to have 5-10% deposit, depending on the rest of your application and the lender in question.
Guarantor type of mortgage
With this type of mortgage, a parent or close family member takes on some of the risks of the mortgage by acting as guarantor. If the homeowner misses a payment, this person is responsible for covering the missed payment.
The main benefit of this type of mortgage is that you can sometimes borrow up to 100% of the property’s value as the guarantor’s collateral is used in place of a deposit. This can make them an attractive option for young people or lower earners.
On the negative side, your guarantor could be liable for any shortfall if your property has to be repossessed and sold.
The guarantor cannot be just anyone. Most lenders will require this person to be a close family member, usually a parent.
Becoming a guarantor is a big commitment. The lender will either hold some of the guarantor’s savings in a locked account or take a legal charge over a portion of their property to secure the mortgage.
How Anstee & Co can help you choose the right type of mortgage.
We are a firm of independent mortgage brokers. This means that the mortgage advice we offer is unbiased. There are many factors involved in choosing the right mortgage type, but our team of mortgage advisers are here to help. Why not contact us today to find out how.
You can check out some of the best mortgage rates here which are updated daily.
We have offices in-
- Kettering, Northamptonshire
Our mortgage advisers live and make use of meeting rooms in-
- Bedford, Bedfordshire
- Market Harborough, Leicestershire
- Northampton, Thrapston, and Wellingborough in Northamptonshire
We make full use of video conferencing facilities such as-
- Zoom
- Microsoft Teams
- Facetime
We can also arrange a conference telephone call. The choice is yours. There is no need to visit an office as all work can be handled remotely. Meetings can be arranged at a time and in a way that is convenient for you.
If you have any thoughts or comments on this article, “What type of mortgage is best for me?”, then we would love to hear from you.
Finally, the information contained in this article is for information purposes only and does not constitute financial advice. No action should be taken based on this information alone. Anstee & Co is authorised and regulated by the Financial Conduct Authority (FCA).
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