Mortgage Types & Options
There are many options in this area and this is pretty much determined by your individual circumstances. One of our qualified advisors here at Max Mortgages will discuss the merits of each option based on your situation and the mortgage climate at the time. But here are a few common choices.
Repayment Or Interest Only
The criteria for interest only is quite selective these days and many clients do not qualify for an interest only residential mortgage. But basically an interest only mortgage is whereby you only pay the interest and the amount outstanding does not drop over the term. So you will pay more interest over the term. The capital element can be repaid by various methods such as over payments, ad-hoc lump sums, investments or sale of property. However many buy to let properties are purchased using interest only to aid cash flow and certain tax advantages. With a repayment mortgage, you pay the interest and some capital each month. Therefore the balance drops over the term and the overall interest payable over the term is lower. In some instances, part repayment and part interest only can be an option to aid cashflow.
Term of Mortgage
For residential mortgages many customers prefer to maximise the term as this helps keep the monthly contractual payment to a minimum. Each lender has different criteria as to the maximum age by which the mortgage should be repaid, and sometimes this can be a factor on choosing a lender. However the mortgage can be repaid sooner than the initial term by way of making extra payments. Many lenders impose an upper age limit for termination say at age 70 or 75 years although this can be higher for buy to let mortgages.
Mortgage Rates
Standard Variable Rate (SVR). This is a mortgage where the rate is the lender’s SVR. You may get a discount but in today’s climate an SVR tends to be higher than some other options such as fixed or tracker rates. There have been times when the SVR has been lower than the fixed rate options, but this depends on the economic climate at the time of application.
Discounted. This is where the lender will offer a discount off their SVR for a set period of time. Again different options come into play depending on the overall economic situation at the time of application and your objectives.
Capped/Collar. These are mortgages where the lender specifies what will be the lowest (collar rate) and highest (cap rate) you will pay during the selected period. So if rates go up or down, you remain within the agreed parameters for the selected period.
Tracker. This is where the lender will specify a rate you will pay which will then track the bank of England (BOE) rate for the specified time. So if the BOE rate is 0.5% and your tracker product is BOE plus 1%, you will pay 1.5% until the BOE base rate changes. After the selected period, it may revert back to the lenders SVR or the tracker may not be discounted as much.
Fixed. Here the lender will provide a fixed rate for a certain period. Regardless of what happens to the BOE rate, you will pay the same rate throughout the chosen period. The monthly payment however may change, for example if you make overpayments and reduce the amount owing. There may be limitations as to what you may repay, but often these are more than enough for the majority of people.
London Inter Bank Offer Rate (LIBOR). This is the rate at which banks lend to each other. Often used for specialist lending or special cases, the rate therefore will be higher than the standard BOE. Your mortgage advisor will discuss if a product based on LIBOR rate is being utilised and why.
Offset Mortgages. This is where the lender will only charge you interest on the net balance of your mortgage. So if your mortgage is £450,000 and you have £150,000 in savings with the same institution, you may only be charged interest on the £300,000. So in this case you will effectively pay 1/3 less interest during this scenario. Can be useful in certain situations or if for example you wish to drawdown the mortgage but not want to make extra interest payments until you actually use that money.
There may be other choices, but this covers the main selections available.
The Initial Period
This is how long the initial product period should be. For example how long should you fix the product rate? Most products come with an initial period which can be 2yrs, 3yrs, 5yrs or even longer. This period will determine how long the above options apply before the product reverts to the lender’s SVR. Again this choice is determined by individual circumstances, your objectives and the economical climate at the time. If you are able to secure a great deal, you may wish to select a long initial period to lock in the rate. Conversely if you are unable to secure a good rate because of your circumstances or economic situation, you may want a shorter intial period as you may not want to be tied into an uncompetitive product for the longer term. Many lenders allow you to make overpayments of up to 10% of the amount outstanding without penalty during any such intial period, and this can also be a factor in determining the initial period. Towards the end of the initial period, we then again review to see what product we should move to upon completion of the initial period. Hence the importance of ensuring you maintain good credit rating and income to ensure you do not become ‘trapped’.
Your mortgage advisor will discuss the merits of each option and guide you to the best solution provided by the most suitable lender based on your situation, your attitude to risk and your objectives. Of course it is important to have a long customer-advisor relationship with us to ensure you regularly review and update your arrangements to ensure they fulfil your requirements as things change over what may be 20-30years!
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