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Whether you’re buying a house, unit or apartment, most of us don’t have enough money tucked away to cover the full purchase price. In order to get the full amount needed to buy a property, we need to borrow money through a mortgage.
A mortgage is an arrangement where you borrow money from a lender to buy a property, whether as a home or investment. It usually lasts for between 25 – 35 years.
In exchange for allowing you to borrow this money, your lender will charge you interest. This can be either fixed at a certain rate, or variable.
You’ll usually pay your loan off in instalments known as repayments. These are usually required every month.
A mortgage can also be known as a home loan or as home finance.
|Mortgage lender||Market share|
|Lloyds Banking Group||15.6%|
|Nationwide Building Society||14.4%|
|Royal Bank of Scotland||12.9%|
|Coventry Building Society||3.7%|
|Yorkshire Building Society||2.9%|
You can boil down UK mortgages into the following types:
Unlike a variable rate home loan where repayments move up and down, fixed rate repayments remain unchanged for a set period. This means that for the length of your fixed rate term — usually between one and five years, but sometimes as great as 10 or even 15 years — you’ll know what your repayments will be.
Standard variable rates
A variable rate home loan is a home loan product which has an interest rate which fluctuates up or down over time as your lender sees fit. Unlike a fixed rate home loan where the rate is locked in for a fixed term, the interest rate of a variable rate mortgage moves up and down in accordance with market changes.
Tracker mortgages move in line with a nominated interest rate which is usually the Bank of England base rate. The actual mortgage rate you pay will be a set by your lender at an interest rate above or below the base rate. When base rate goes up and down, your mortgage rate will go up and down by the same amount.
Discount rate mortgages
A discount mortgage works by setting a discount on a lenders standard variable rate (SVR). This means the interest rates can go both up or down in line with the SVR.
Standard home loans have repayments that include both the interest and a small proportion of the capital. If you remove this capital portion from the equation, you can reduce the amount you make in repayments each month. This can be good for some borrowers, including investors and those building a property, but there is an added risk with this type of loan as your loan amount doesn’t reduce, meaning you will still have to pay the whole capital off at the end of the term.
Offset mortgages are linked up to your savings account and can help to reduce your interest payments. Any money deposited into the account offsets interest on your mortgage. For example, if you have a mortgage of £100,000 and savings of £25,000, your mortgage interest is calculated on £75,000 for that month.
This cuts the amount of interest you pay but the mortgage rate is likely to be more expensive than on other deals. You can still access your savings if you need to but the more you offset, the quicker you’ll repay your mortgage.
Capped rate mortgages
This is a type of variable rate mortgage but one with a limit or cap on how high your interest rate can rise. So you can benefit from low interest rates but also enjoy the comfort of knowing that your interest rates will never exceed a certain level.
When you take out this kind of mortgage you also receive some money back. This is normally a percentage of the loan.
This option is available on many other types of mortgage and it allows you some flexibility when making repayments. You can choose to pay more when you can afford it and if you have already overpaid then you can pay less or take a payment holiday. These types of mortgages tend to have higher interest rates than other deals.
95% and 100% mortgages
These types of mortgages are designed for people that either have no deposit or are struggling to save a significant deposit. Loan-to-value rates of 95% or 100% typically incur higher interest rates. Although they were previously widely offered, 100% mortgages fell out of favour after the financial crisis, and now only tend to be offered when a family member is able and willing to provide a guarantee secured against their own residential property.
Buy to let mortgages
Buy to let mortgages are for people who want to buy a property and rent it out rather than live in it themselves. The amount you can borrow is at least partly based on the amount of rent you expect to receive.
We know that sometimes it seems as though the financial world operates in a different language altogether making it hard to understand what you’re getting into when applying for a mortgage. So to help you out, we have created a mortgage A-Z to simplify the terms your most likely to come across in your application.
L&C work with over 90 different mortgage lenders, including NatWest International, giving you a great opportunity to compare different mortgage deals in the market. To apply for a mortgage through L&C click the link below.
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