Different types of mortgage

Broadly speaking there are two types of mortgage product, a fixed rate and a variable rate.

• Fixed rate

  A fixed rate is just that, an interest rate that is fixed for a specified period of time (typically 2, 3, 5 or 10 years) and means that your repayments will remain the same for that period of time.

• Variable rate

  A variable rate means that the interest rate you pay for a specified period of time can change. There are different types of variable rate available and typically will be one of the following:

  • Standard Variable Rate – this is the lender's own variable rate and will run for the term of the mortgage.
  • Tracker – this tracks an underlying rate such as the Bank of England Base Rate at a specified margin above it.
  • Discount – this is discount from the lender's standard variable rate for a specified amount of time.
  • Capped – this is a tracker rate that has a 'Cap' at a certain level meaning that no matter how high the underlying Base Rate may go, the rate applied to your mortgage will never be higher than this cap during the capped rate period.

At this time, if you do nothing, you will revert to the lender's variable rate at that time which may mean that your repayments increase.

Typically you will be free from any penalty period meaning you will be free to either secure a new product with your lender, known as a product transfer, or to remortgage to another lender without penalty.

If we have arranged the original mortgage for you, we will attempt to contact you 3 months before your product expiry date and let you know what options are available to you ready for when your product expires.

The factors that can cause the interest rate on your mortgage to change are typically either of the following:

• Bank of England Base Rate change

  If your variable rate is a Bank of England Tracker rate, it means your interest rate 'tracks' the Bank of England's base rate at a margin either above or below the Base Rate. So, if the Bank of England alter their rate, the rate charged to your mortgage will also change.

  For example you have a product that tracks the Base Rate at +1.5% and when you take that product the Base Rate is 0.25% the rate applied to your mortgage is 1.75% (1.5 + 0.25). Then the Bank of England increase the Base Rate to 0.75% this means the rate applied to your mortgage will then be 2.25% (1.5 + 0.75).

  Conversely if the base rate was 0.75% when you started and then reduced to 0.25% then the interest rate applied to your mortgage would reduce by 0.5%.

  The Bank of England review the base rate on the first Thursday of every month.

• The mortgage lender could increase their variable rate

  This is the same as the above except the underlying rate which your mortgage product tracks is the lender's own base rate.

  If the lender alters their variable rate then the rate applied to your mortgage would alter accordingly.

  There are usually conditions related to this such as the lender having to give advance notice in writing before altering their base rate.

• LIBOR increases

  LIBOR stands for 'London Inter Bank Offer Rate' and in layman's terms is the interest rate at which banks lend to each other.

  LIBOR tracker products are not as common today as they were 10-15 years ago but the principle is the same as the above.

  If LIBOR changes then your mortgage rate will alter accordingly, the main difference being that LIBOR is reviewed quarterly rather than monthly.

A second mortgage, also known as a secured loan is a further mortgage taken out behind an existing mortgage.

This loan takes second charge on the property title behind the original mortgage, therefore the original mortgage is known as the first charge mortgage and then the additional borrowing is known as a second charge mortgage.

An offset mortgage is a mortgage that is linked with a bank current account and then any funds held in the bank account are 'offset' against the mortgage balance so that mortgage interest is only charged on the difference.

This means that if funds are consistently held within the current account, the amount of interest paid on the mortgage over the term will be less - for example, if you have a £200,000 offset mortgage and have £50,000 in the current account, mortgage interest is only charged on the £150,000 difference (£200,000 - £50,000 = £150,000).

The funds in the current account are accessible anytime like any other current account, if any of the funds in the current account are withdrawn then interest will be charged on the mortgage for that amount. The bank account does not attract any interest at all, however, if the mortgage interest rate is higher than the interest rate on a current account then this can be of financial benefit.

If you believe you would benefit from an offset mortgage compared to a standard mortgage then an independent adviser can advise you of the lenders that are offering this type of product whilst being able to provide you with some projections on the amount of interest that could be saved over the term.

This is a mortgage that is used to either purchase or refinance another residential property.

There are many reasons for a second property for example the second property could be a flat in the City close to work or a holiday home in the Country used for family breaks.

Not all mortgage lenders will lend on a second property.

An Independent Adviser can determine which lenders are most likely to lend to you for your needs.

A Buy-to-Let mortgage is a mortgage on a property that has been purchased for the sole purpose of renting the property out.

Buy-to-Let mortgages usually require a larger deposit than a residential property purchase. Most lenders calculate how much they will lend on the property using the rental income from the property.

The rental income will need to be a certain percent in excess of the mortgage payment, for example 145%, whilst the mortgage payment for this calculation is worked out at a "stress rate" for example 5.5% rather than the actual interest rate charged. Each lender has their own calculation for this.

An independent adviser will be able to work out how much you can borrow against a property based on the projected rental income.

This is when you remortgage your existing home on a Buy-to-Let mortgage so that you can rent it out whilst you move into a different property.

This type of mortgage can be a means to release equity in the existing home to use as a deposit for the purchase of the new home.

Similar to a Buy-to-Let mortgage, the amount that can be borrowed is subject to lender’s LTV limits as well as the projected rental income meeting the lender’s affordability calculation.

You may be able to keep your mortgage with your current lender and obtain consent to let. This is where you notify your lender of your intentions to the let the property out and provided they grant their consent, you can keep your mortgage as it is whilst still moving to a new property.

As well as financing the property that is going to be Let out you must also give consideration to any void periods. This is when there are no tenants in the property so therefore you will not be receiving any rental income. The mortgage payments must still be maintained in the event of any void period so you should have a contingency fund or plan for this event.

You will also need to declare the rental income to the Inland Revenue at the end of each fiscal year by way of a Tax Return and the rental income received may be subject to income tax. You may want to consider hiring a tax adviser who can let you know what your potential tax liabilities will be.

As the landlord of the property, you will be liable for the maintenance of the property and ensure that it is habitable for your tenants and therefore you may incur costs to maintain the property which you will need to factor in.

You must ensure that the property has suitable Landlords Building Insurance. You may also want to consider a policy that will provide cover in the event of any damage caused by your tenants.

When purchasing a Buy-to-Let property the Stamp Duty is calculated as a second property which is higher than a residential property so you must ensure you have the funds to pay for this.

If you plan to sell the property in the future, capital gains tax will be payable on any increase in value of the property since it was purchased.

This stands for "House of Multiple Occupancy".

An example of this would be a property that has been converted to be let out to students whereby the property has multiple living units which are let on an individual basis.

Yes it is possible to obtain a mortgage to either purchase or remortgage a HMO property.

The property will need to have the relevant licence from the local authority to confirm it is an approved HMO property and complies with Fire & Safety regulations and you will need to show this to the lender before they will lend on the property. The amount that can be borrowed will be subject to the lender’s LTV limits as well as meeting their affordability calculations.

The Right to Buy is a Government back schemed whereby people who have rented a property for a period time from a local authority or housing association in England can apply for the right to buy that property.

If the authority/housing association accept your application then they will provide you with a discount of up to 70%- or £78,600 across England and £104,900 in London Boroughs (whichever is lower) of the property value.

The amount of discount provided is subject to the length of time you have been a public sector tenant. This discount can then be used as the deposit for the property.

Mortgage lenders who partake in the scheme will lend 100% of the discounted purchase which means that the only money needed to fund the purchase is any mortgage application fees, legal fees and stamp duty.

The local authority/housing association will retain a charge over the property for up to 5 years (known as a pre-emption period) meaning that if you sell the property within this period, you will have to repay the discount. This is calculated on a pro-rata basis over the pre-emption period.

Shared Ownership is designed to help those who can’t quite afford to purchase 100% of the property. Shared Ownership will allow you to purchase between 25% and 75% of the property with the remainder of the property owned by the housing association.

Rent is then paid on the share of the property that you do not own. Mortgage lenders will then lend a percentage of the share your are purchasing. Shared Ownership Schemes offer you the chance to purchase the remaining shares of the property when you can afford to do so this is known as ‘staircasing’.

The value of the remaining shares will be calculated based on the market value of the property at that time, not at the value of the property at the time of purchase.

For example if you purchase 75% of a £200,000 property originally, the remaining 25% that you are renting is valued at £200,000 x 25% = £50,000.

If you decide the purchase the remaining 25% of the property 5 years later and the property is worth £300,000 at that time then the remaining share to be purchased will be worth £300,000 x 25% = £75,000.

Bridging Finance is a short term mortgage that can provide you with a cash injection for up to 12 months.

The loan is secured against property or land and the money raised can be used for any legal purpose including:

• Purchasing a Property at auction
• Building a Property
• Refurbishing or rebuilding the property
• Repaying a Tax Bill
• Purchasing a property Abroad
• Completing a New Purchase whilst the existing property is for sale
• Business Injection or Business Purchase
• Any other legal purpose

The Finance can be arranged within days making it a much faster way to release cash compared to a mortgage. As the lending is based on the value of the security, the purpose of the loan and the ability to repay the loan by the end of the term, there aren’t as many underwriting requirements which can facilitate a quicker completion time.

Bridging Finance is borrowed on an interest only basis and the interest can be rolled up monthly and included in the final repayment so there are not any monthly repayments.

As Bridging Finance is a short term solution, the interest rate will usually be higher than a mortgage so should only be considered in the right circumstances.

You must have a viable strategy to repay the finance within the 12 month term and this will need to be demonstrated to the lender at the outset of the loan.

A Commercial mortgage is a loan secured against a property that is primarily used for Business Purposes such as a shop, office or industrial unit.

Lenders can consider commercial lending a higher risk as the property may be more difficult to sell in the event of repossession so interest rates tend to be higher on a commercial mortgage than a residential mortgage.

A commercial mortgage can be used to purchase or remortgage a commercial premises which you own but rent out, you do not have to run a business from the premises yourself.

This is when a Family member is named on a mortgage in order to help someone purchase a property if they can not afford to buy it on their own.

An example of this would be a Parent helping their child purchase a property whilst the child is at University or just beginning their working career. Family Assisted mortgages are only offered by a restricted number of lenders.

An Independent Adviser will be able to assess your situation and determine which lenders are most likely to lend to you.