A mortgage is a loan you take out to buy property. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. If you change lenders but don't move home it's referred to as a 'remortgage'. The Financial Services Authority (FSA) regulates the way most mortgages are sold, but not second-charge and most buy-to-let mortgages. This means firms must follow certain rules and standards when dealing with you.
The suitability of different mortgage deals will depend on your personal circumstances and any tie-ins or penalties that may be attached. We have set out a brief guide to the most common mortgage products below.
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There are the two main ways you can pay off your mortgage. These are called 'repayment' or 'interest only'.
With a repayment mortgage you make monthly repayments for an agreed period (the term) until you've paid back the loan and the interest.
Interest only mortgage
With an interest only mortgage you make monthly repayments for an agreed period but this will only cover the interest on your loan. You'll normally also have to pay into another savings or investment plan that'll hopefully pay off the loan at the end of the term.
Flexible, Current account and offset mortgages
Flexible, current account and offset mortgages give you more control to vary your monthly payments. They can be used with repayment or interest only mortgages. For example you can:
- pay less one month and more the next
- make lump sum repayments (and sometimes draw these back)
- take a 'payment holiday'
- pay off your mortgage early
Interest Rate Deals
As well as deciding on your repayment method, you'll need to look at the interest rate deals on offer, for example:
Standard variable rate
With a variable rate mortgage your payments go up or down with the lender's standard interest rate. This often changes following Bank of England base rate changes.
Standard variable rate with cashback
With these deals you get a cash lump sum as well as the loan when you take out the mortgage. You're usually tied into the variable rate for a set period.
You pay a lower interest rate to begin with then move to another rate (usually the lender's standard variable rate) after a set period.
Tracker rates are linked to the Bank of England rate or some other 'base rate'. This means they'll always go up or down in line with changes to the base rate.
You pay a fixed rate of interest for a set period, so you know exactly what you'll be paying each month during that time. When the fixed period ends, you'll usually move to the lender's standard variable rate. There are usually penalties if you pull out early.
Capped or cap and collar
With a capped rate you pay a variable interest rate, but there's a ceiling so your payments won't go above a certain amount for a set period. Some deals include a collar too - this is the lowest rate you'll get. If interest rates fall below the collar, you'll lose out.
Buy to Let Mortgages
Buy-to-let mortgages have been on offer since the late 1990s. They are specifically designed for investors to borrow money to purchase rental properties in the private sector. Lenders use a different formula to calculate how much to lend than they do with an owner-occupied property, where a multiple of annual earnings is typically used.
Typically the interest rates that are offered on BTL mortgages are fairly close to residential mortgage rates but will on average be higher and typically charge higher fees. This is due to the perception amongst banks and other lending institutions that BTL mortgages represent a greater risk than residential owner-occupier mortgages.
This type of investment has become very popular in the UK over the last five years or so, as house prices have dramatically increased. Another reason for their popularity is the tax advantages that are available to UK BTL investors. Rental income is considered in the same way as salary, and is therefore often taxed at 20% or even 40%. However, landlords can deduct costs from the taxable portion of their rental income, and these costs can include the interest portion of their BTL mortgage repayments as well as maintenance costs on the property. This tax set-up has made BTL investments more popular over the last few years.