The headlines earlier this year about UK banks cutting interest rates on mortgages were very intriguing for many borrowers. Banks cut interest rates for only one reason; increased competition.
There are so many lenders claiming to have the best mortgages on the market getting the right one for you can be a confusing time. Whether you are a first-time buyer or looking to re-mortgage, if you are looking for a mortgage, make sure you know this first!
What is a mortgage?
A mortgage is a loan that is intended to be used to purchase a property. The amount borrowed, plus interest, is secured against the value on the property purchased. A monthly payment schedule is drawn up to include interest and continues until the loan has been paid back in full.
To get a mortgage, most lenders must be a percentage of the property value upfront, which is known as a deposit. Based on the average home price in Britain, this amount would be around £24,000. The remainder of the property value is made in the form of a loan to the buyer through a mortgage.
The remaining cost after deposit is expressed as a percentage of the loan, which is known as the loan to value (LTV) ratio. Depositing more money upfront to lower your LTV gives you more mortgage options to choose from, plus a lower overall interest amount you will have to pay.
What Mortgage Do I Need?
There are different types of mortgages for different needs, they include:
First-time buyer – Mortgages for this group include deals and incentives like cash back or smaller deposits, all to encourage first-time home buyers to get on the property ladder. Lower deposit schemes, often requiring just a 5 percent deposit, are often known as 95 percent mortgages.
Remortgage – Homeowners with a current mortgage are smart to shop around for competitive interest rates through a re-mortgage situation, which trades one loan for another with better terms. Online comparison sites make it very easy to find a competitive rate and arrange a remortgage.
Second Mortgage – As the name implies, this type of mortgage is a loan that is taken out in addition to the current mortgage already on the property. Most of the time, the value of the second mortgage is based on the equity you own in your property. Home movers looking to sell their current house whilst moving to a new one will need this type of mortgage.
Buy-to-Let Mortgage – These mortgages are designed for people who want to rent out the property they purchase to someone else. Commonly, buy-to-let mortgages are interest-only, with the monthly payments going toward interest and the principal amount due at the end of the mortgage term, typically when the property is sold. Alternatively, repayment mortgage terms can be set with higher payment levels, covering principal and interest and the property belonging to the borrower outright after the terms. This type of mortgage typically requires a 25 percent deposit on the amount.
What are the Different Terms?
Mortgage terms are either variable or fixed rate, and the interest paid is determined by the lender. Variable rate tracker mortgages have their interest rate tied to the Bank of England.
Discount variable rate mortgages are another type, wherein the rate is linked to the lender’s standard variable rate. The fixed rate mortgage is set for a consistent amount over the life of the mortgage and only changes if the borrower remortgages the property because they found a better rate.
Unless you can afford to buy a property outright, which few people can, you are going to need a mortgage. Do your homework and make sure you are getting the right mortgage, with the right terms, and the most competitive interest rate you can find.