- Salli Anstey
With so many different types of mortgages on the market, choosing one can be daunting.
At Private Wealth Mortgages, we’ve decided to straighten this out for you with a jargon busting guide. Choosing the right mortgage is incredibly important, and the right one for you will always depend on your personal circumstances. Get the wrong one and it could you cost thousands.
Our guide starts at the very beginning with ‘how a mortgage works’, to help you understand the basics. Of course, any solution will be subject to the variables around your unique personal and financial circumstances, and only by assessing these alongside your future goals can the perfect mortgage for you be found.
A mortgage and how it works
A mortgage is a loan taken out to buy property or land. Historically they have run for 25 years but the term can be shorter or longer. The loan is ‘secured’ against the value of your home until it’s paid off. The money you borrow is called the capital and the lender then charges you interest on it until it’s repaid. You will need to pay a deposit – which is a chunk of money that goes towards the cost of the property you’re buying.
The type of mortgage you’re able to apply for will depend on how you want to repay the loan. Below are the two main ways, that dictate the type:
Repayment mortgage:
With a repayment mortgage, you pay the interest and part of the capital off every month. At the end of the overall term, you will have paid it all off and own your home, provided payments have been kept up to date.
Interest-only mortgage:
With an interest-only mortgage, you pay only the interest on the loan and nothing off the capital (the amount you borrowed) until the end of the term – making the monthly repayments much cheaper. Not all lenders offer interest-only and those that do will have strict criteria such as an approved repayment vehicle (such as an ISA or stock market investment) in place to pay off the capital at the end of the term.
Part & Part:
Some lenders will offer a mortgage on a part repayment, part interest-only basis, ideal if you want to have lower monthly payments than a repayment mortgage, but less capital to pay off at the end of the mortgage term than an interest only mortgage.
Not many people stay in their first home forever, so it’s likely you will have many different types of mortgage arrangements suited to each different stage of your life.
Different types of interest rates
The interest rate of your mortgage will affect how much you repay overall and what you pay each month. It is accrued across the lifetime of the mortgage and is charged as a percentage rate on the amount you owe. Here’s some of the most popular types available:
Fixed interest rate – you pay a set amount each month for the duration of the fixed period, typically 2, 3 or 5 years.
Variable interest rate – the amount you pay can rise and fall in line with market conditions.
Discounted variable interest rate – the amount you pay can rise and fall in line with market conditions, however, it allows you to have a discount on your mortgage payments for a specific period.
Tracker interest rate – the interest rate is linked to the Bank of England Base Rate and is equivalent to that rate plus a certain percentage which is set by the lender.
Capped rate – the lender has put a ‘cap’ on the maximum interest rate that can be charged, providing you with the security that your monthly repayments will not rise above a certain amount.
There are also types of mortgages that are designed specifically to suit certain financial circumstances, such as ‘offset mortgages’, ‘buy to let’ or ‘contractor mortgages’. There are others designed for when you buy your first property, such as ‘help to buy’ and ‘guarantor mortgages’. Our qualified mortgage advisors will assess the level of mortgage repayments you can afford by looking at your income, commitments and monthly spending, as well as talk to you about your personal circumstances and long-term plans to get the mortgage that best suits your needs. A more detailed explanation
What are: LTV, APR and SVR?
LTV is ‘Loan to Value’, which simply means the amount of your home you own outright, compared to the amount that is secured as a mortgage. The more equity you have, the lower the LTV, the lower your interest rate is likely to be.
SVR stands for ‘Standard Variable Rate’ – the main mortgage rate charged by a lender. This is the long-term rate of interest that borrowers will be charged once their fixed or introductory discounted or tracker period ends, if another rate isn’t chosen.
APR is ‘Annual Percentage Rate’ – the overall cost of a mortgage, including the interest and fees. It assumes you will have the mortgage for the whole term, so may not be the best way to compare deals as it can be misleading when you see this figure expressed on your paperwork.
The above is a snapshot of what’s available and are subject to individual financial circumstances and lender specifications, so give us a call today at Private Wealth Mortgages on 01403 270006. We can provide you with a free, no-obligation consultation where we will consider all the viable options available to you and advise you on the best way forward. Alternatively, email: info@privatewealthmortgages.co.uk