If you’re not familiar with the different types of mortgages available today then this should at least give you the basis of the common options. Through any application process our advisors will seek to explain and recommend the most appropriate type given your financial and personal situation, based on our mortgage review interview – so don’t worry if you still have questions after reading this summary.

Fixed rate mortgage

The interest rate and monthly payments of your mortgage stay the same for a specified period of time (most typically 2 or 5 years, but other terms are available). This provides greater certainty and as such will suit people who want the security of knowing exactly how much they’ll be paying each month. If interest rates rise, your payments during the initial rate (or ‘deal’) period don’t change, but equally if interest rates fall you won’t benefit.

Tracker rate Mortgage

The interest rate payable on your mortgage tracks the Bank of England Bank Rate (commonly referred to as the Base Rate) for a specified period of time (most typically 2 years but other terms, including lifetime are available). This will likely take the form of x.xx% above base rate, for example with a base rate of 0.50% a rate of 2.00% above base rate is 2.50%. If base rate rises, your interest rate and thus monthly payments will also rise, but if the Bank of England Rate falls then so will your payments. Tracker deals are often slightly cheaper than fixed deals, so suit people seeking the lowest monthly payments at the outset who can afford to cover any potential increases in the future.

Discount Mortgage

The interest rate on your mortgage is set as a discount to the lender’s Standard Variable Rate (SVR) for a specified period of time. It works in a similar way to a tracker mortgage, except that the reference rate it tracks is set by your lender instead of the Bank of England.

Offset Mortgage

An offset mortgage allows you to use your savings to reduce the balance of your mortgage on which you pay interest. For example if you have a £100,000 mortgage and £20,000 of savings you can offset the savings to pay interest only on the net £80,000 balance. This can save you money in a few ways:
•lower monthly payments as the applied net balance is lower
•pay the higher monthly amount and pay off your mortgage faster (saving interest in the long run)
•saving tax that you may have paid on any interest received on your savings balance

If you have a lot of savings these deals can often be the best option, but be aware that they tend to have a higher interest rate than a standard (i.e. non-offset) deal.

Standard Variable Rate (SVR)

At the end of an initial rate period (or ‘deal’ period, for example 2 or 5 years) mortgages typically switch to the lenders SVR. Normally this is higher than you can achieve by remortgaging to another deal. The general exceptions to this are if you’re on a high loan to value (LTV) or your borrowing amount is low (for example under £30,000).

For most people taking new mortgages today, a traditional Capital & Interest Repayment mortgage is likely to be both the most appropriate and most widely available option. Here we explain what that means, and what the alternatives could be. As always our advisors will seek to understand your mortgage needs, then explain and recommend the appropriate choice, when going through a mortgage application with you.

Capital and Interest (also know as Repayment)

Your monthly payments consist of both an element to repay the amount borrowed for your home (capital) and interest. At the outset of your mortgage, when the remaining term is longer, your monthly payment consists of a higher portion of interest, but over time that reduces and you pay off more capital. At the end of the mortgage, assuming all payments made on time, you owe nothing more.

Interest only

Your monthly payments cover only the interest on your loan. Because you do not pay off any of the capital balance over the mortgage life, that balance does not reduce over time and thus the average balance you pay the interest on is higher, meaning you pay more interest.

At the end of the mortgage (e.g. 25 years) you still owe the lender the initial amount (capital) borrowed, as such its very important that you have a suitable “repayment vehicle” in place to pay off the loan at that time. Typically a suitable repayment vehicles would be ISAs, stocks and shares, unit trusts, pensions or the sale of a property.

In recent times most lenders have introduced restrictions on interest only residential mortgage lending for making it much more difficult to get it as a new customer – typical requirements are for lower Loan to Values (LTVs), high salaries (minimum usually £75-100k) and high borrowing amounts (>£250k). You’ll also need to be able to evidence the repayment vehicle exists (e.g. statement of balances held in ISAs).

Interest only mortgages for buy to let properties remains common, as the sale of that property is considered a suitable repayment vehicle.

“Part and Part”

This is a mortgage split into two elements. One part on a capital and interest repayment basis and the other interest only. The split does not have to be in equal proportions. Given the reduction in availability of interest only noted above, these have become less common in recent years for new mortgages.

Almost all mortgage lenders charge fees, but these can vary significantly from lender to lender and from deal to deal. We can’t cover them all here, but those you’re most likely to encounter are explained below. Any mortgage recommendation from us will always include an explanation of the applicable fees and charges.

Application or Administration Fee

A fee charged by the lender to process your application. This is non-refundable once a formal application is submitted. You can still get an Approval In Principle prior to this without incurring any cost.

Product Fee

The product fee is an amount payable for the mortgage in addition to the interest thereafter. It is not based on an event such as application, merely that you chose a fee based product. Generally there is a choice between paying a fee to secure a lower monthly payments from the lower rate, or taking a fee free product which will have a slightly higher rate. Typically product fees are c£1000, but we’ve seen a range of £200 to £2,500 in recent times.

If you don’t have the available cash to pay the fee, most lenders will allow the fee to be added to the loan amount borrowed.

The ‘right’ answer depends on the amount your borrowing, the size of the fee and your priorities in balancing long term costs versus shorter term payments. There’s no easy ‘rule of thumb’ to share as there are too many variables, but don’t worry, we can help with all of this.

Our Broker Fee

Our fee is £399, payable only once we’ve successfully secured you a mortgage offer. That means if for some reason, and despite our best efforts, we can’t get you a mortgage it costs you nothing and we don’t get paid.

Early Redemption Charges (ERCs)

The majority of mortgages have a specified period for which there will be a charge if you repay the loan early. This will generally be more for a fixed rate deal than a tracker or discounted one. It will also tend to be higher, at least initially, the longer the deal lasts – i.e. expect the costs of breaking a 5 year deal to be more than breaking a 2 year deal. Lifetime tracker deals tend to have no ERCs.

These can be expensive if they have to be paid. Particularly when looking at fixing your rates for a longer term its important to consider carefully what flexibility you may need in the future and as such whether you need a “portable” mortgage and what products have what levels of ERCs.

Withdrawal Fee

Similar to the administration fee, but only charged if you do not proceed to draw down the fund after you application has been submitted (and approved – as with administration fees the lenders will not charge this fee if they refuse to proceed rather than you). Typical reasons for incurring this charge would be if a house purchase falls through or you decide not to move or re-mortgage after all.

Mortgage Account Fee

A fee charged by banks, usually £200-300, for administering your account for however long you keep your mortgage with that lender. typically covers such things as annual statements, duplicate statements if required and simple account changes like amending direct debit payment dates. It is only charged for you first ‘deal’ with the lender as a new customer.

Higher Lending Charge

An additional fee charged for borrowing at high Loan to Values (LTVs), i.e. with low deposits. Thankfully most lenders ceased charging such fees several years ago.

Money Transfer Charge

A fee (usually £20-35) to electronically transfer the money to your account / to your solicitor at the time your mortgage completes.

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