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There are many different types of mortgage currently
available on the UK market. It is worth noting
that, when comparing mortgages, it's best to compare
the monthly amount you are quoted rather than comparing
various interest rates (the latter should be expressed
as an Annual Percentage Rate or APR). There are
a number of different ways APRs can be calculated
on mortgages so two mortgages that charges ostensibly
the same rate of interest could result in two different
monthly payments, depending on the APR. |
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| Types
of Mortgages |
| Standard
Variable Rate |
This is the standard rate
of interest that lenders use and as it says, it is
variable. This is because it is linked to the Bank
of England base rate - so whenever that goes up,
so will your mortgage rate, and when it goes down
your mortgage rate should too; which means your payments
will fluctuate according to the bank base rate… |
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| Fixed
Rate |
A fixed rate mortgage has a fixed
interest rate for a set period of time, normally
between 2 - 5 years depending on the deal. This means
your mortgage payments will be exactly the same each
month, until the deal expires.... |
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| Buy-To-Let |
Buy to let mortgages used to be few
and far between, however, most lenders now offer
a range of buy to let mortgages. Indeed the number
of buy to let mortgages now accounts for more than
15% of the total mortgages.... |
|
| Offset
Mortgages |
Offset mortgages essentially
work by taking advantage of the fact that we tend
to get less interest for our savings than we pay
for our debts. Essentially, you have a savings... |
|
| Discounted
Rate Mortgage |
Discounted rate mortgages are exactly
what they say; a discount on the lender's Standard
Variable Rate (SVR). For example, a mortgage lender
may offer a 2% discount on its SVR mortgage for two
years. With an SVR of 6%, this would... |
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| Tracker
Rate |
Whilst the discounted and capped rate
mortgages are both linked to the mortgage lender's
Standard Variable Rate (SVR), tracker mortgages leave
out this middle man and track the Bank of England
base rate. For example, a... |
|
| Capped
Rate |
If you like the idea
of a discounted rate mortgage, but don't want your
payments to vary too much, a capped rate mortgage
may be for you. Although capped rate mortgages
are still linked to your mortgage lender's... |
|
| Flexible |
Flexible mortgages allow some flexibility.
So, instead of being tied down to the same mortgage
payment for the whole term, they allow you to overpay
(usually up to 10% of your mortgage) when you have
a bit more cash, and... |
|
| Current
Account Mortgage |
A close cousin of the Offset mortgage,
the Current Account Mortgage (CAM) takes things one
step further. Instead of just using the contents
of your savings account to effectively reduce your
mortgage debt, CAMs roll everything up... |
|
Standard Variable Rate
This is the standard rate of interest that lenders use
and as it says, it is variable. This is because it is
linked to the Bank of England base rate - so whenever
that goes up, so will your mortgage rate, and when it
goes down your mortgage rate should too; which means
your payments will fluctuate according to the bank base
rate.
Standard Variable Rate (SVR) mortgage is linked to the
Bank of England base rate. So whenever the rate goes
up, so does the mortgage rate and when it goes down so
should your mortgage rate; which means your payments
will fluctuate according to the bank base rate. Usually,
SVR Mortgages are set around 1-2% above the prevailing
Bank of England base rate.
Those who took out a discounted or fixed rate mortgage
for a fixed period of time are automatically reverted
to SVR mortgage when that period expires, resulting in
higher monthly repayments for the same mortgage than
before. However, when interest rate is low and
predicted to drop further in the future then this type
of mortgage is just as attractive as others.
If your mortgage is about to revert to SVR then contact
PFI Management and one of our advisers will be able to
search the whole of the market to recommend an alternative
mortgage which may save you money.
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top >>
Fixed Rate
A fixed rate mortgage has a fixed interest rate for
a set amount of time, normally between 2 - 5 years depending
on the deal. This means your mortgage payments will be
exactly the same each month, until the deal expires.
A fixed rate mortgage is an excellent choice if you
are on a budget and you need to know exactly how much
you will be spending each month, for this reason it is
very popular amongst first time buyers. It can also be
worth choosing a fixed rate mortgage in times of interest
rate volatility: if you believe rates will rise in the
near future, fixing your mortgage rate could save you
money. Of course, this works the other way round, you
could end up paying more for your mortgage should mortgage
rates drop.
Lenders offer fixed rate mortgages over a set period
of time usually between 2 to 5 years. Obviously if the
rates are particularly low then it would be prudent to
fix the period for longer than 2 years; however, other
factors may have to be considered in making this choice.
Contact us for no obligation advice and we will be happy
to recommend the deal that meets your requirements and
circumstances. We have access to the ‘whole of
the market’ which includes high street and specialist
lenders.
Normally lenders offering fixed rate mortgages build
in penalty clauses within the deal and you have to be
aware of the implications. For example, if you move your
mortgage to another lender for a better deal or use a
windfall to pay off your mortgage during the fixed rate
period then you will have to pay early repayment charge.
This is usually a percentage of the outstanding mortgage.
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Buy-To-Let
Buy to let mortgages used to be few and far between,
however, most lenders now offer a range of buy to let
mortgages. Indeed the number of buy to let mortgages
now accounts for more than 15% of the total mortgages.
First of all, you need to decide whether you want to
end the mortgage term with a fully ‘paid for’ property.
If you have made no arrangements to pay off the mortgage
capital (either through a repayment mortgage or a separate
investment) then you may have to sell the property so
you can repay the capital.
For a buy to let mortgage, decision making is important
to realise the maximum benefits. For example, do you
need some of the rent to live on then an interest only
mortgage would probably be more appropriate, after making
the interest payments, there should be some rent left
over for your own pocket. If you don't need the rent
for yourself, then all of it can be used towards the
interest payments with the surplus being used for the
repayment of the capital or, indeed, to help finance
a further buy to let investment.
The advantage of a repayment mortgage is that the property
will be all yours when the term of your mortgage ends.
The risk is that you will have less money to play with
should you need some of the rent for other purposes and
it's also not as tax-efficient.
Your mortgage interest payments can be deducted from
rental income for tax purposes. However, if you have
a repayment mortgage, any capital payments can't be offset.
This means you will have to pay tax on a larger part
of your income. That's why it can make a lot of sense
to get an interest only mortgage on a buy to let, where
the total mortgage payment can offset as income.
The advantage of an interest-only mortgage is that your
monthly mortgage payments will be lower so more of the
rental income will be available to you and you don't
need to worry about the capital repayment until the end
of the term. The risk is, if you haven't made other arrangements,
to pay off the capital at the end of your mortgage term,
you may have to sell the property to pay off the capital.
There are also flexible buy to let mortgages which enable
you to enjoy an element of both the repayment and interest
only. In order to establish the best product for you
and your circumstance, contact PFI Management and one
of our advisers will be more than happy to discuss all
the options available to you.
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Offset Mortgages
Offset mortgages essentially work by taking advantage
of the fact that we tend to get less interest for our
savings than we pay for our debts. Essentially, you have
a savings account linked to your mortgage account, but
instead of earning interest on your savings, your money
is used to "reduce" the balance of your mortgage.
For example if you had a £100,000 mortgage with £10,000
in your savings account, you would only accrue interest
on the £90,000 portion. There are tax advantages
too - particularly if you're a higher rate taxpayer,
as you don't pay any tax on the reduced interest. So,
rather than receiving, say, 3% interest on your savings
after tax, you can actually save interest of 6% on your
mortgage.
As an example, £10,000 in an account paying 5%AER
would earn £500 in gross interest over a year
- £400 for a lower rate taxpayer and £300
for a higher rate. Over 10 years a lower rate taxpayer
would make £4,802 and a higher rate £3,439.
At the same time, a £100,000, 10-year mortgage
at 6% would accrue £33,224 in interest. By using
that £10,000 to offset the loan (and effectively
make it £90,000) you would accrue £19,902
in interest, a whopping £13,322 less. So although
a higher rate taxpayer would have sacrificed £3,349
in interest on his savings, he would have saved nearly
four times this amount on his mortgage.
Offset mortgages are a good option for anyone with a
large amount of savings. As a rule of thumb, to make
a real difference you need around £10,000 in savings
for every £100,000 mortgage and this level of saving
has to be maintained in the account.
Offset mortgages can also be particularly good for people
who are self-employed, or receive an annual bonus. By
putting money that's been set aside for tax purposes
into an offset savings account, self-employed homeowners
can benefit from their cash working against their mortgage,
paying in annual bonuses can make a substantial difference.
Unfortunately, offset mortgage rates have tended to
be far from competitive in the past, with rates of one
per cent or more than the best standard variable rate
mortgage deals.
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Discounted Rate Mortgage
Discounted rate mortgages are exactly what they say;
a discount on the lender's Standard Variable Rate (SVR).
For example, a mortgage lender may offer a 2% discount
on its SVR mortgage for two years. With an SVR of 6%,
this would make your interest rate 4%.
Discounted rates are of course variable as they are
linked to the SVR, which is in turn set by the base rate.
This means should the base rate fall, the SVR rate on
your mortgage will quickly follow suit, meaning a decrease
in your monthly mortgage re-payments. Likewise, should
they rise, your monthly re-payments will increase. Lenders
also tend to be pretty quick at implementing an SVR rise,
but can be a little slower at applying a cut in the rate.
This type of mortgage is, therefore, not for those on
a tight budget as your mortgage payments could potentially
vary quite a lot. However, if you have a little more
money to spare and rates are low, or predicted to go
down, then a good discount rate will save you money.
At the end of the discounted rate term, you can simply
re-mortgage, to another deal.
Length of Discount
Consider how long the mortgage discount is offered for
(typically 2-5 years). If rates are low, you will benefit
from reduced mortgage payments.
Early Repayment Charges
Again, like fixed rate mortgages, discounted mortgages
tend to have early repayment charges should you try
to change your mortgage or pay it off within the discounted
period. Remember you also need to watch for those extended
tie-ins.
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top >>
Tracker Rate
Whilst the discounted and capped rate mortgages are
both linked to the mortgage lender's Standard Variable
Rate (SVR), tracker mortgages leave out this middle man
and track the Bank of England base rate. For example,
a tracker mortgage rate may be set at 1% above base rate.
The advantage here is that should the base rate be cut,
you will benefit immediately as you don't have to wait
for your mortgage lender to decrease his SVR. Likewise,
if base rates rise, so do your repayments.
Like the discounted rate mortgage, you can't predict
how much your monthly mortgage re-payments will be. Which
means a tracker mortgage is not a good choice for those
on a tight budget. However, if your finances aren't too
stretched, tracker mortgages can be a great way to benefit
immediately from any future interest rate cuts.
Length of Discount
Consider how long the mortgage discount is offered for
(typically 2- 5) years.
Early Repayment Charges
Again, like fixed rate mortgages, tracker mortgages tend
to have early repayment charges should you try and
switch or pay off your mortgage within the tracker
rate period. You also need to watch out for those extended
tie-ins.
In addition, it's always worth reading the small print
to find out how quickly any base rate changes are implemented
on your mortgage.
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top >>
Capped Rate
If you like the idea of a discounted rate mortgage,
but don't want your payments to vary too much, a capped
rate mortgage may be for you.
Although capped rate mortgages are still linked to your
mortgage lender's SVR, their interest rate is "capped" for
a given term normally between 2 to 5 years. So, if interest
rates rise above your capped rate, you will benefit -
and if they fall, so should your mortgage rate. It's
like getting the security from a fixed rate mortgage,
with the potential savings of a discounted rate mortgage.
The disadvantage is that this kind of flexibility comes
at a price, and capped rate mortgages are usually higher
than both fixed and discounted mortgages. However, they
can be a good option for those that need to know their
outgoings, but would still like to benefit should rates
fall.
Similar to other mortgages, discounted mortgages tend
to have early repayment charges should you try to change
your mortgage or pay it off within the discounted period.
Remember you also need to watch for any extended tie-in
periods.
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Flexible
Flexible mortgages allow some flexibility. So, instead
of being tied down to the same mortgage payment for the
whole term, they allow you to overpay (usually up to
10% of your mortgage) when you have a bit more cash,
and underpay should you need a bit of a breather.
However, you should really only underpay if absolutely
necessary, as you will simply be increasing your mortgage
debt. Normally it would be expected that you have built
up a reserve before you would be allowed to take this
option.
Although the idea of overpaying on your mortgage may
not appeal with interest being calculated on a daily
basis overpaying could save you thousands of pounds over
the term of your mortgage. Overpaying on your mortgage
is, therefore, usually worth doing, if you can afford
it.
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Current Account Mortgage
A close cousin of the Offset mortgage, the Current Account
Mortgage (CAM) takes things one step further. Instead
of just using the contents of your savings account to
effectively reduce your mortgage debt, CAMs roll everything
up together. That means your current account, savings,
plus any other loans are all under one umbrella. So not
only are your savings helping to reduce the debt, but
any money in your current account is helping too.
Even if your current account is never that full, it
still counts, as every pound will help reduce that mortgage
debt slightly, however, little time it's in the account
for.
Of course, to get the best effect from a CAM you need
to have no other debt apart from your mortgage, and as
much cash in your account as possible. You use a CAM
like a current account, paying in and taking cash when
you need it.
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