Different Types of Mortgages Explained
There are many different types of mortgages
If you are looking to buy or refinance a property, you’ll need to make several decisions when choosing a mortgage. With so many choices available, trying to make the right decision can be confusing.
There are 3 main types of mortgages: standard mortgages, professional mortgages and specialist mortgages – all of which we’ll be covering in detail below. Regardless of the type of mortgage you need, you’ll also need to choose a mortgage deal which determines how much interest you’ll pay throughout the product term.
Mortgage Product Types
When it comes to choosing what type of mortgage product to have, you have two options – fixed rate and variable.
Fixed rate mortgages
Fixed rate mortgages, as their name suggests, are rates that are fixed for a set term usually for 2-5 years. Your monthly payment remains unchanged throughout the term of the mortgage deal. This makes it a safe option for those who have a fixed budget as you will know exactly how much your payment will be each month and can budget accordingly. If the Bank of England base rate rises and mortgage rates rise you won’t be affected, as your rate remains the same until the end of the term.
This can be a good thing if rates rise, but if rates drop, your rate will remain unchanged so you won’t get the benefit of any reduction in market rates. If you want to make overpayments on your mortgage, fixed rate mortgages usually have limits as to how much you can repay without incurring early repayment charges (ERC’s).
Standard variable rate mortgages
Each lender has its own Standard Variable Rate (SVR), this is not linked to the Bank of England base rate and could change at any time. If the base rate rises, the SVR may increase too but there’s no guarantee it will reduce if the base rate drops.
Your mortgage will normally revert to the SVR after your fixed rate, tracker or discount mortgage ends. It’s a variable rate so your payment can go up or down, it also tends to be higher than promotional rates offered by the lender. It’s therefore worth making a note of when your current rate ends to allow yourself plenty of time to switch products or move to another lender.
Tracker mortgages track another rate such as the lender’s standard variable rate or the Bank of England base rate. A tracker usually tracks a few percentage points above one of these rates for a set term. For example,. if the Bank of England Base Rate is 4% you might pay 5% interest if the deal is 1% above the base rate. Some trackers run for the lifetime of the mortgage but in most cases, they will be for a short term.
Once the term ends, the mortgage normally reverts to the standard variable rate. With trackers, there is always a chance that your rate could rise so it’s worth bearing this in mind.
Discount mortgages are similar to tracker mortgages but instead of tracking above the SVR, Bank of England Base Rate or LIBOR rate, they track below. If the base rate was 4% the lender’s deal might be a 1% discount in which case your interest rate would be 3% for the duration of the deal.
They can be a good option if you think interest rates are likely to fall but like with a tracker you also take the risk that rates could rise.
Different types of mortgages: Standard mortgages
Standard mortgages are some of the most common mortgages. The buyer’s circumstances tend to be more straightforward so it tends to be easier to secure finance. There are four main types of standard mortgages, which we’ll be covering below. These include first time buyers, buy to let, remortgages and home movers.
First time buyers
Anyone buying a property for the first time will be treated as a first time buyer. First time buyers typically need to borrow the most in terms of loan to value (LTV) and have smaller deposits. These are often saved or are gifted by family members who want to help the buyers onto the property ladder.
As first time buyers are traditionally just starting out on the housing ladder, they normally have lower income which can reduce how much they can borrow, so it’s often worthwhile working with a mortgage adviser who can guide them through the process.
Once on the housing ladder, many borrowers will at some point decide to move house. This is usually due to a change in their housing requirements due to a growing family or a new work location. Equally, for older borrowers, they might decide to move home and downsize to a smaller property.
Some lenders will allow borrowers to ‘port’ their existing mortgage to a new property. This means they keep their current mortgage and move it to the new property. Alternatively, buyers will settle their old mortgage on the sale of their property and use the proceeds from the sale as equity towards their new purchase. They’ll then take out another mortgage either with the same lender or another lender. The borrower could lend more, or reduce their mortgage depending on the new property
If you want to change lenders you’ll need a remortgage. This usually happens because their current mortgage deal has ended and another lender is offering a better deal. Borrowers have the choice to move their existing mortgage to another lender ‘as is’ or they can request to increase their borrowing to do home improvements, repay other debts or use it as an investment.
Looking to borrow more? This is often possible although some lenders do have restrictions as to how much you can borrow, so this is worth bearing in mind.
Buy to let
Buy to let mortgages are for borrowers who want to purchase a property which will be let out to tenants. These are widely available, but unlike residential mortgages which are based solely on the applicant’s ability to repay the mortgage, buy to let mortgages are based on the level of rental income.
Lenders assess the expected rental income to ensure that this is sufficient to comfortably cover the mortgage payment. Lenders expect that the rental income will cover around 125% – 145% of the mortgage payment. (The exact percentage will depend on the buyers’ tax status and earnings).
Different types of mortgages: Professional mortgages
Professional mortgages are mortgages for those who work in professional occupations. This might be a doctor, a dentist, solicitor, or any other occupation which has had to undergo extensive training to work in their field.
Whilst there isn’t a specific subset of mortgage products and deals available to professionals, some lenders do have more favourable criteria. Professionals can sometimes access improved affordability and less stringent employment criteria. For example, if they’ve recently changed role or not been in the role for long, it can be easier to get a mortgage compared to those in the same situation who don’t work in professional occupations.
Why choose a broker to secure your professional mortgage?
Our team has over 20 years of experience with working with professionals to find the mortgage that suits their needs. We have access to lenders who offer more flexible criteria to professionals. We also know which lenders are the best fit for our professional clients depending on the field they are in.
Our friendly team also know how busy you are and that you aren’t always available during office hours. We can make it easier on you by helping with the paperwork and liaising directly with the lender and solicitors to streamline the process and get a decision faster.
Specialist mortgages are mortgages for borrowers whose needs are more complex and unique. The borrower might be self-employed or own a limited company, they might have a history of bad credit, want to add a family member to the mortgage, or are high net worth individuals with inconsistent income. These types of mortgages are more specialist and will sometimes require a specialist lender depending on the individual’s circumstances. Applications can also be more intensive, with more information requested to secure funding which is why it’s worth working with a specialist mortgage broker. Our team is used to dealing with complex applications and have a thorough understanding of the unique circumstances faced by borrowers. We’ll also ensure that you aren’t being mislead into applying for the wrong products that aren’t right for your needs. Get in touch to discuss your specialist mortgage today.
How do I choose the right type of mortgage?
Your individual circumstances and intentions will determine whether you need a standard mortgage or a more specialist mortgage. Our mortgage advisers will recommend what is most suitable for you and will help you to answer the following questions:
- Do you want a fixed rate so that you can budget and know exactly what you will pay each month for the next couple of years?
- Do you think rates are going to go down so want to choose a variable rate so you can benefit from this if they do?
- What are your plans for the property and how long do you intend to live there?
- Do you have savings and if so how much?
- Do you intend to make overpayments on your mortgage?
- What is your monthly budget and how much can you afford if rates were to rise?
- Is it likely your income will increase or decrease much in the next few years – will you/ your partner be going on maternity or adoption leave?
These are just some of the questions you should consider when deciding what type of mortgage deal you will be comfortable with. It’s also worth speaking to our team who can advise you further.