Mortgage Loans

In general terms, you will need a mortgage loan to enable you to buy a property. A mortgage lender will usually be willing to lend you between three and four times your gross salary, but these days and multiples of up to nine times are not unheard of, but that is extreme. A loan of over four time salary will also mean paying higher interest rates, so it is probably undesirable. A mortgage lender will include your partner’s salary in the equation if you’re buying with that partner.

You will need a deposit to buy a house. Loan-to-value (LTV) is the phrase that a mortgage company uses to describe what percentage of the value of the property they are willing to lend you. The higher this is, the higher the mortgage they will lend you, and the less cash you will have to find for a deposit.

There are also mysterious things called mortgage arrangement fees. These are fees payable by you to the mortgage lender for giving you the mortgage! These can range from £499 to nearly £2000 depending on the type of mortgage you take out.

There are many different types of mortgage available in the UK market. Let’s see what they are all about.

Standard Variable Rate

Often shortened to SVR, this pretty much says what it is. It the standard rate offered by the lender and it can vary because essentially it is linked to the Bank of England base rate. So, whenever the Bank’s base rate goes up, so does the SVR. But an SVR is usually at least 1% and more like 2% higher. That makes SVRs expensive, and most people don’t choose to have an SVR when they take out a mortgage. But it is the rate your mortgage will be switched to when your period of offer (be it fixed, discounted etc) ends.

Fixed Rate

This type of mortgage has the interest rate fixed for a set period of time. Usual periods are two, three of five years. Until the deal runs out your mortgage repayments will be the same every month, irrespective of what the Bank’s rate is doing. This can be an attractive option with a tight budget and gives the security of knowing what your payments will be. It is popular with first-time buyers who often are on a tight budget. Things to look out for are the length of the fixed rate period and what happens after that – you’ll probably be switched to the SVR. And if you want to change your mortgage before the fixed period ends, will there be an early redemption penalty – and what will it be?

Offset Mortgage

Still fairly new to the UK market, the idea of offset mortgages is to take advantage of the fact that there is less interest from savings than is taken away for debts. Thus, your savings account is linked to your mortgage account, and your savings amount is used to reduce the balance of your mortgage. Offset mortgages can be good if you’ve got good savings and won’t need them. Not surprisingly there is a bit of a catch: offset mortgages have higher interest rates than most fixed rates, but competition is forcing them down.

Discounted mortgages

These give a discount on the lender’s SVR. As an example, a lender’s SVR might be 7.5%, but the discounted rate 2% lower at 5.5% for two years. Discounted rate mortgages follow the SVR so they are variable, going up and down with the SVR, but lower. Look out for the length of the discount, and avoid tie-ins.

Tracker mortgages

These track the Bank of England base rate rather than the lender’s SVR. They are obviously set above the Bank’s rate and follow it to the day, up or down. Look out for the length of the track – usually 2, 5 or 10 years.

Capped rate mortgages

For a set period the mortgage will move like a discounted mortgage, but there is an upper cap over a set period. This gives a limit on how much your mortgage goes up, but it can come down as much as it likes! Rates, of course, tend to be higher than regular fixed and discounted mortgages.

Flexible mortgages

These allow you to vary your payments, which can be handy if your income fluctuates. They enable you to overpay when you can, or underpay when cash is tight. Overpaying can save you quite a bit of money in the long term, so can be worthwhile if you can afford it.

On all mortgage types be wary of extended tie-in. This means that the redemption penalty is payable even after your discounted, fixed etc period is over, and by then you’ll probably be on the lender’s SVR. Very bad.