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.