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Seemingly almost impossible to get for many at the moment, but let’s take a quick look at mortgages: what they are, what types are available, and how they work…
A mortgage is essentially a long-term loan issued to the borrower (you), by the lender (a bank, building society etc.), in order to purchase or re-finance a property.
Mortgages can be issued for all sorts of types of property including: flats, houses, office buildings, and even land. One property excluded from mortgage loans is a mobile home. This is because it’s classed as a caravan which you cannot get a mortgage on.
Mortgages on traditional properties are offered by many of the mainstream providers, but you may have to find a specialist mortgage lender in order to get one when looking at more alternative purchases such as land.
Loans vs mortgages
So what’s the difference between a loan and a mortgage?
Well it’s not really a case of comparing one against the other as a mortgage is just a type of loan. A loan is the umbrella term for all manner of methods of borrowing money, and a mortgage loan is just one small part of that taxonomy.
All mortgages are loans, but not all loans are mortgages.
Types of mortgage
There are all sorts of different types of mortgages, but for the sake of this post being 100 times longer, we’ll stick to the main ones you’re more likely to come across:
- Fixed Rate
These mortgages fix your interest rate for a set period of time. This means until the end of the term period you will pay the same amount each month (unless you decide to overpay) no matter what happens to the interest rate during that time.
This means you could benefit if the interest rate rises but you’ve fixed it at a lower rate, or miss out if it falls.
You could almost see tracker mortgages as the opposite of the above. Where fixed rate does exactly as it says on the tin and fixes the rate of interest on your mortgage for a certain period of time, tracker mortgages track the Bank of England interest rate + an area of margain decided by the lender.
- Standard Variable Rate (SVR)
This is the type of mortgage the borrower will fall into once their fixed rate or tracker term period has ended, unless they choose to move onto a subsequent fixed rate or tracker.
Types of repayment
- Capital Repayment
This repayment method allocates a portion of your monthly payments to the actual capital borrowed as well as the loan. Paying more of the capital decreases the Loan to Value rate (LTV) and thus increases how much of the property you actually own.
Interest-only mortgages only pay the interest on a mortgage and not the actual capital. This usually means your monthly payments will be smaller, but you have to show some proof of funds in order to be able to pay off the capital at the end the mortgage term.
A somewhat popular option for first time buyers, these allow people to borrow up to 95% of the agreed purchase value. This means buyers require only a 5% deposit which is a lot smaller than the more common 10 – 15%.
When the pandemic hit, this option was completely removed by most, if not all, lenders. This has recently started to be reinstated with a new government backed 95% mortgage scheme which launched back in April of this year.
100% mortgages also exist, but are extremely rare. Sometimes also referred to as a ‘Guarantor Mortgage’, you’ll need a third party guarantor to agree to cover the repayments in the event you can no longer do so.
This is an option for those using the purchase of a property as an investment, rather than as their primary residence.
Again, buy-to-let is more of an umbrella term where the landlord can then decide what time of mortgage to take on in order to pay down the loan and capital. Interest-only are quite a common mortgages on buy-to-let properties.
- Endowment, Investment & Pension
The final types of mortgage repayment option relate to how the borrower intends to pay their mortgage at the end of the repayment term.
More relevant to older borrowers, they can choose to either pay the rest of their mortgage repayments through an endowment policy (life insurance), from an investment portfolio, or from their pension. As with all the above options, proofs of funds must be provided in order to be considered for these options.
We’ve covered a number of the common phrases you’ll come across related to types of mortgage and repayment options. But let’s take a look at a few others that might crop up:
The lump sum of cash the borrower needs to have as a downpayment on their property. The higher the deposit, the lower the LTV rate and the better the terms you’re likely to be offered.
The phrase used when the borrower misses a mortgage repayment.
Missing one or more repayments puts the borrower into ‘arrears’. Too many missed payments, and the further into arrears the borrower enters, the more likely the chance of…
The lender has the power to take control of your property and remove the borrower from it completely.
- Loan to value (LTV)
As mentioned earlier, this is the phrase given to the percentage of your mortgage that is still yet to be repaid when compared to the amount of capital already paid back. For example, if the property is valued at £250,000, and you put down a £50,000 deposit, your LTV rate would be 80% because of your 20% deposit. Hopefully this will only decrease as you pay more and more of the mortgage.
- Agreement in principle
This is an agreement from the lender to the borrower that they are willing to lend you Xamount. It’s a good idea to get this agreement before you make an offer on a property to avoid complications arising later down the line.
- Affordability criteria
These are the set of checks a lender will conduct on the borrower to make sure they can afford the monthly repayments. This will include things like credit checks, outstanding loans, any other debts, income and deposit size.
Potential fees related to the mortgage process
As with everything, there are many fees related to the mortgage process, both before, during and after the lifetime of the mortgage. These will all vary depending on the terms of your mortgage contract. Here are a number of those:
- Arrangement and booking fee
Both related to setting up the mortgage, these can be added to the mortgage repayments rather than paying the full amount up-front, but will mean the repayments are potentially more expensive.
- Valuation fee
This pays for the valuation survey to get a rough idea of the expected value of the property before you make an offer.
- Mortgage broker fee
If you decide to use a mortgage broker to help you find a mortgage and guide you through the process. They will either take a flat rate or commission, and either take the fee from you or the lender.
- Missed payment fee
If you are late on any repayments and end up in arrears, you could be charged additional fees.
- Early repayment fee
Every mortgage has a repayment term, but you are usually allowed to overpay during this period. However, some lenders will restrict the amount you’re able to repay (for example 10% more a year). If you repay more than this, you may be charged a fee. Charged for doing the right thing…incredible.
So there’s a brief overview of mortgages and some of the terms you can expect to come across when dealing with these types of financial products.
As always, there’s a tonne of options out there, so it’s always best to do your research and shop around to find the best deals. Check out MSE’s guide to mortgages here>>.