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Find out about the different types of mortgage; First Time Buyer Mortgages · Home Mover Mortgages · Remortgage · Offset Mortgages · Cashback Mortgages · Second Charge Mortgages · Repayment Mortgages · Interest Only Mortgages.
There are a variety of different types of mortgage in the UK and all the jargon can at first seem a bit off-putting.
In this article we break down and explain the most common terms and types of mortgages in simple English. Hopefully this will give you a better understanding and help you find the right mortgage.
If you still have any questions then please get in touch. We are Bristol Based Mortgage Brokers and we’d be happy to help.
First-time buyer mortgages are designed specifically for people who are new to the housing market. They may involve incentives such as cash back schemes or higher levels of Loan to Value (i.e. a lower deposit).
Broadly you will be considered a first time buyer if you have never owned a residential property in the UK or overseas. This includes a share in residential property. However, as is usual with property and mortgages, the rules can be complex so if you are unsure please get in touch with a mortgage professional to confirm if you are a first time buyer.
You can find out more on our dedicated First Time Buyer page.
A Home-mover mortgage is, as the name suggests, aimed at those who are moving house and need to secure a mortgage on their new property. It is similar to a First Time Buyer mortgage in that it is aimed at property purchases, but there tend to be more favourable rates and Loan to Values available (as you have a provable history of being a mortgage customer).
A Home-mover mortgage can be any of a variety or rate types (see more on different rate types), repayment types or term lengths and a good mortgage broker will help you find the right one for you.
A remortgage is where someone who already has a mortgage on their property replaces it with a new mortgage, either with the same bank or with a different provider. Although it appears to be a switch between mortgages it is more accurately described as taking out a new mortgage to replace the original one.
Remortgaging is a very important process that can save considerable amount of money and/or free up additional funds. The main reason for remortgaging is to get a better mortgage, which often involves a lower interest rate or monthly payment. This can be because your own situation has improved since you took out your original mortgage (you may earn more), your Loan to Value may have improved as you pay down the original balance or there are better rates on the market than what you are currently paying.
When you remortgage you also have the opportunity to increase your amount of borrowing, which can be useful if you have debts to consolidate or have another need for funds (such as home improvements).
More information on remortgaging and the benefits can be found on our remortgage page.
An Offset Mortgage differs from the conventional types of mortgage by having a savings or current account that’s linked to the mortgage account. This current or savings account is sometimes referred to the “offset account”. An Offset Mortgage can be either Repayment or Interest only
But why would you want a savings account linked to your mortgage?
With an offset mortgage, the lender deducts the money in your linked savings account from the outstanding mortgage balance. They then charge interest on this net balance (instead of just on the mortgage balance as they would do with a conventional mortgage). So the benefit of an Offset mortgage is that it could reduce the amount of interest you’re charged, as you’re effectively being charged interest on a lower balance.
A cash back mortgage is another that works pretty much like it sounds. Upon mortgage completion a cash lump sum (the “cashback”) is paid to the applicant. Amounts vary, but it is usually either a fixed amount of several hundred pounds or as a percentage of the mortgage.
Whilst this money can be seen as very useful incentive, as moving into a new home can involve a lot of costs, there is a need to be wary. The cashback amount should be looked at alongside the interest rate and all the other features of a mortgage. A qualified mortgage broker should be able to help you make a decision taking all of the benefits and features into account.
A Buy to Let mortgage is a loan that’s specifically designed for those who are looking to purchase property with the aim of renting that home out rather than living in it themselves.
Like with a residential mortgage, a lender will look at the quality of your credit history and the size of your deposit along with the value for the property. However, unlike with a residential mortgage where it is based on your income and expenditure, the amount you can borrow for a BTL is usually based on the amount of rent the property is likely to achieve. Most lenders ask for the rental income to be around 25-30% higher than the mortgage payment.
Also bear in mind that deposit requirement and the interest rates on Buy to Let mortgages tend to be higher than for the equivalent residential mortgages.
A second charge mortgage is a mortgage that you take out in addition to your current mortgage, so you will end up with 2 mortgages secured against your property. A second charge mortgage effectively allows you to use any equity you currently have in your home to take out further borrowing.
A second charge mortgage works in broadly the same way as your main mortgage, although it will likely have a different interest rate or payment type and will still be secured against your home. They are often used as an alternative to a re-mortgage especially if you are on a fixed rate mortgage with early repayment charges or if you have an interest only mortgage.
The second mortgage behind your main mortgage in priority if the property was to be repossessed and as a result lenders tend to charge a higher rate than they would if it were the first mortgage.
The funds from a second mortgage can be used for a variety of reasons including home improvements, debt consolidation or if you are planning a wedding.
If you want to find out more please visit our dedicated Second Charge Mortgage page or get in touch and we’d be happy to answer any queries you may have.
Once you have received your mortgage you will need to repay it over the term of the mortgage. There are 2 main way in which a mortgage is repaid in the UK, either on a “Repayment” basis or on an “Interest Only” basis:
Repayment mortgages are the most common mortgage taken out today. Many mortgages might have features built on top or fancy marketing names and terms, but are often a version of a Repayment Mortgage.
Its a simple concept – you borrow an amount from a lender and pay it back over a set period of time. This can be upto 40 years but is more often between 20 and 30 years. Each monthly payment is part interest payment and part paying off part of the underlying loan (the “capital”). The monthly amount is set so that the mortgage is fully paid off at the end of the term. Hence a “Repayment mortgage” as it will all be repaid by the end of the term.
In reality, given that the mortgage terms are so long, the likelihood is that the original mortgage will be replaced by a new mortgage before the original term is up. This is usually done to secure a better rate on a new mortgage deal or because the customers needs have changed, e.g. the need for a larger mortgage.
As the name suggests, an Interest Only mortgage is one where only the interest due is paid as part of the monthly mortgage payment. This is in contrast to a Repayment style mortgage explained above, where the monthly payment is the interest and a payment of the amount borrowed (capital). As there is no repayment of the capital then the amount borrowed does not reduce as with a Repayment style mortgage. When the mortgage term is up the borrower can still owe the entire mortgage amount.
The benefit of an Interest Only mortgage is the much lower monthly repayment but you’ll still be liable for the capital borrowed when the term comes to an end. This means that you’ll need to be 100% certain you’ll have the money to hand once the mortgage terms ends, otherwise you maybe be forced to sell your home. This is why those borrowers that use Interest Only mortgages need to be separately building up their savings so that they have the money to repay the mortgage when it’s due.
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Leaf Financial Advisers Ltd. is an appointed representative of Julian Harris Financial Consultants, which is authorised and regulated by the Financial Conduct Authority, FCA number 153566.
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Tax treatment is based on an individual’s unique circumstances.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. Please note that some mortgages such as commercial BTLs are not regulated by the FCA. Equity release may involve a lifetime mortgage or a home reversion plan. To understand the features and risks, ask for a personalised illustration. Equity release may impact the size of your estate and it could affect your entitlement to current and future means-tested benefits.
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Leaf Financial Advisers
39 Cromwell Road,
St Andrews,
Bristol,
BS6 5HD
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