AMA Financial Solutions
- Mortgage Types
We know mortgages, they form a large percentage of our work.
Our advisers have the knowledge and experience to help you
make the most effective decision when choosing a mortgage.
Whether it be a first time purchase, moving homes and even
buy-to-let, we can help and advise you on the most suitable
mortgage. Before you contact
us we have put together a brief overview of the different
types of mortgages available.
Base rate Trackers
They're simply a mortgage that tracks the Bank of England
base rate at an agreed rate.
So you might have a Base Rate Tracker Mortgage which sets
your mortgage at 1% above the base rate for, say, the first
two years.
Bridging Loans
This is a loan that is usually taken out to solve a temporary
cash shortfall that may arise when buying a property or
business, or perhaps paying for a renovation.
A typical example of when you may need a one would be if
you want to buy a second property before you've sold your
first.
Or you may need one if you're buying property at auction.
The products and services promoted here are not part of the Openwork offering and are offered in our own right. Openwork Limited accept no responsibility for this aspect of our business. These products are not regulated by the Financial Services Authority.
Buy to Let
Mortgage providers' traditionally only offered loans for
people buying homes. An increasing number are offering loans
for a property you want to "buy to let", (i.e.
not to live in as your home, but to rent/let out to tenants).
Getting income from the rent is seen as a good investment
by some and is becoming more commonplace.
It's particularly popular for retirement planning because
of the growing concerns about the inadequacies of traditional
pensions. The old saying "There's nothing more solid
than bricks and mortar" is more relevant than ever.
The fears over the past couple of years that the market
was saturated seem to have been incorrect. However make
sure that your buy to let property is in an area which is
likely to have a demand.
There is a wealth of information on buying property to
let. Just make sure if you're paying for it that it's been
written by someone with direct experience in the field.
Buy to let mortgages are not regulated by the Financial Services Authority.
Cashback deals
These deals vary but, as the name suggests, you get cash
- in addition to the money you're going to be borrowing.
You may use it to pay for moving costs and furniture etc.
Cashback deals are perhaps best seen as a sales technique
to get you to take out a mortgage with a particular lender.
It's very rarely a genuine gift and is probably used to
tie you in to the mortgage lender - who will eventually
more than make their money back.
Capped Rate
Capped rate mortgages are supposed to offer the best of
both variable and fixed rate deals.
You agree to have a limit - a cap - on the maximum amount
of interest you will pay over a particular period of time
while allowing it to fall if the variable rate drops.
Good points: You get the best of both worlds. If the variable
rate goes higher than your agreed capped rate then you're
only paying up to the agreed capped rate. Whereas if it
falls below your capped rate then you pay less as well.
So you benefit from falling interest rates but are protected
from rate rises. You know the max you'll be paying.
Bad points: There's only a limited number of these deals
on the market and they're not thought to be very competitive
because the interest rate you'll be paying may be higher
than your average fixed or discounted rate mortgage.
You pay to get the best of both worlds.
Also there'll probably be an admin charge by the mortgage
lender - though this may not be much compared to the amount
you might have paid if your mortgage wasn't capped and interest
rates went up.
Current account Mortgages
This is a relatively new type of product which goes further
than the usual flexible mortgage.
Your mortgage account effectively becomes your bank account.
You get a cheque book, direct debit facility, credit &
cash card and regular statements etc. Your earnings are
paid straight into this "mortgage/bank account".
This means that effectively you pay less interest on your
mortgage - because your earnings are being used to "pay
back" the loan.
Because the interest is calculated daily any changes in
your balance, no matter how short the period, will change
your interest payments.
You also avoid paying the tax, which you would have been
liable for if you were putting your earnings into an interest
/bank account because, technically, you are not earning
interest.
There is a definite financial advantage to this idea, in
theory saving you thousands over the mortgage term.
The general criticism of Combined Mortgage and current
accounts is that they don't give you a natural "limit"
to your spending (i.e. you never seem to run out of money).
Most of us aren't great money managers.
It's perhaps too easy to borrow too much from the account
- for a holiday etc. - and before you know it your debt
could have doubled.
Are you disciplined enough to be able to look carefully
at what's happening with your account and to keep up regular
repayments. You could easily be lulled into a false sense
of security and overspend.
If you're interested in this type of mortgage, there are
now various ones on offer. The best way to find one is to
get a mortgage adviser to help you.
Discounted Variable Rates
To tempt new customers many lenders will offer a new borrower
a discount on their standard variable rate, for a set period.
Your payments will go up and down, as with a standard variable
mortgage, but you'll benefit from a discount on the standard
variable rate.
After the agreed set period the interest rate will switch
into the mortgage lender's usual standard variable rate.
The rate for new borrowers is usually lower than for existing
customers. So try to shake off that customer inertia and
change mortgage lenders every couple of years - having checked,
of course, that there's no penalty for leaving.
The penalties for changing to another mortgage lender may
last longer than the agreed discount term.
Lifetime Mortgages
If you are already a homeowner - with or without a mortgage
- then you might want to release some equity from your home
to give you a cash lump sum.
This means that if you have paid off a significant amount
of your mortgage and/or property prices have risen, you
can benefit from some of the "profit" that is
locked into your house without having to sell your home.
This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.
Remortgaging
Lenders provide a variety of packages for doing this, but
they are generally described as "equity release"
mortgages.
Typically you will be able to borrow up to 85% of the equity
in your home, given to you in a lump sum which you then
pay back like a normal mortgage. This can be used to pay
for home improvements, lifestyle changes, home repairs –
almost anything, really.
Fixed Rate
This type of mortgage is where you and the mortgage lender
agree to fix the interest rate owed on your loan for a set
period of time.
The period of time is usually between 1 and 5 years but
could be longer. (That simply depends on the exact mortgage
deal you choose).
After the agreed period, the interest rate on your loan
usually reverts to the lender's standard Variable Rate.
Good Points: You know exactly what you'll have to pay each
month. No surprises.
Bad points: If interest rates drop you may be paying more
than you might have done if you'd gone for the Variable
Rate. But interest rates might rise.
If you want to leave before the agreed term the early redemption
penalty is usually significant. For example you may be charged
six months gross interest if you leave a five-year fixed
rate agreement.
Some penalties could even go beyond the fixed-rate period.
This would be an "overhanging redemption penalty".
Always read the small print and ask as many "stupid
questions" as you feel like. You must be clear on what
everything means.
Flexible Mortgages
The details will vary but basically this type of mortgage
allows you to be flexible according to your future circumstances/
needs without having to pay a penalty.
So if you need to pay less due to unemployment or whatever,
you can take a "payment holiday".
Or, if you win the lottery, you can pay more than usual
- i.e. saving on interest payments in the long run.
Group Mortgages
A group mortgage is a mortgage held by 2-4 people, with
the amount lent being based on the incomes' of all those
people.
The property being purchased is also jointly owned by all
the people on the mortgage - so four friends might buy a
house, based on all four of their incomes, and 25%-owned
by each of them.
Group mortgages have been around for a few years now, but
over the last couple of years have experienced a surge in
popularity as house prices have continued to rise, pricing
many first-time buyers out of the market.
Interest only mortgages
This is an arrangement where you're only paying off the
interest on the loan.
Unlike a repayment mortgage you are not paying off the
capital debt part of the mortgage.
So the mortgage costs you less which means you can borrow
more.
But this idea that you can pay less is only a short term
solution because you are supposed to set up a side by side
investment because...
...the capital debt part must be repaid by the end of
the mortgage term by your having made simultaneous monthly
payments into a separate investment plan.
The idea is that this investment plan has hopefully grown
enough to pay off the capital.
Mortgages in principle
Getting a mortgage and buying a house are usually very
much intertwined.
When you find a house, you'll probably have to move fast
to secure it. To prevent being delayed while sorting out
a mortgage you could first get a "mortgage in principle".
Having one means you should be able get the actual mortgage
quicker when the race to buy your chosen home begins.
A mortgage in principle is a conditional offer made by
a mortgage lender that - provided the information you give
them is correct - they will "in principle" give
you the loan you have discussed with them.
Knowing what you can afford will also help you narrow your
search.
It's very useful to have one before you even start looking
for a house to give you the edge over any competition.
You can get this offer in writing to show to Estate Agents
and sellers who will see you as a serious prospect.
To get a mortgage in principle you have to go through the
same motions as an actual mortgage. That is: Consider what
type of mortgage do you want and then find a mortgage lender
you feel can offer you the best deal.
It's only when applying for the actual mortgage
that the mortgage lender will want to see the proof of your
income etc.
Repayment mortgages
This is the old fashioned, traditional type of mortgage
and remains the only way the property is actually guaranteed
to be yours at the end of the mortgage term - provided you
have maintained payments during the term of the loan.
Your mortgage debt is divided into capital repayments (i.e.
repayment of the money you borrowed) and interest payments
(i.e. repayment of the interest you're being charged for
the loan).
As you pay off your mortgage every month you're paying
off a bit of capital and a bit of interest until the full
debt is repaid.
You usually pay off mostly interest in the early years
and then gradually more of the capital debt. It may seem
as if this is costing more but that's because unlike the
other types of mortgages you're paying off the capital and
not just the interest.
Standard Variable rate
Here's how these type of mortgages work.
The Bank of England sets a base rate. This is the basic
interest rate - which is that bit on the news you've probably
ignored for years when they get all excited about interest
rates going up or down.
The mortgage lender's interest rate is set higher than
the base rate - say 1 or 2% above it.
So if the base rate is 5% and your mortgage lender is charging
you 2% above the base rate, you'll be paying 7% interest.
Now the Bank of England can change the base rate at any
time. So if they raise it by 1.5% overnight the base rate
is now 6.5%.
So your mortgage is now 8.5% i.e. still 2% above the base
rate.
Your mortgage is variable because it goes up and down i.e.
as the base rate varies
Each of the mortgage lenders have their own standard variable
interest rate. They vary a great deal offering as much difference
as 1%. It may not sound much but on a £100,000 loan
that's £1000 per year.
Good Points: You might get lucky and see the interest rate
drop.
Bad points: You might be unlucky and see the interest rate
rise.
A fee of up to a maximum of 2% of the loan amount is payable on completion. Typically, this will be £500.
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