Available Mortgage Types — Find-The-Best-Mortgage

Independent Mortgage Advice

Types of Mortgage

The reference below details some of the more popular mortgage types available.

Interest-only Mortgages, Repayment Mortgage Guide, Remortgage Guide, Buy-to-let Mortgage Guide, Flexible Mortgage Guide, Guide to Commercial Mortgages, Self Build Mortgages

Interest-only Mortgages

With interest only mortgages only the interest is actually paid off with each mortgage payment. The borrower also takes out at the same time, an alternative 'repayment vehicle' (method of paying off the mortgage) such as an ISA, pension plan or an endowment policy.

The monthly repayments do not repay any of the outstanding capital balance. So it is important that the repayment vehicle payments are maintained, otherwise it will not be possible to pay off the mortgage at the end of the term.

Endowment Policies - This is the most common type of interest only mortgage which also provides life assurance cover and a fixed payment for investment. The fixed payments are based on the amount of the loan together with the mortgage term and are designed so that, at maturity, the amount invested and earnings are enough to pay off the mortgage. However - there is no guarantee that, when the endowment matures and 'pays out', the balance will be sufficient to repay the mortgage, the funds success depends on the interest rates.

ISA - The Individual Savings Account (ISA) is a tax free way of saving. Using an ISA as a repayment vehicle has increased in popularity, however due to the ISAs complexity, it is only for the financially sophisticated or borrowers taking advice from a qualified financial adviser.

Pension Plan - Life assurance cover is provided and the monthly payments are then made into a pension fund. When the benefits are eventually taken, the mortgage is repaid using tax-free cash from the remainder of the fund.

Repayment Mortgage Guide

With a repayment mortgage the monthly repayments consist of repaying the capital amount borrowed as well as the accrued interest. Your mortgage statement, usually received annually, shows the amount borrowed decreases throughout the term.

The main advantage of a repayment mortgage is that at the end of the term, you can be sure that the total amount of the debt has been repaid. It also removes the risk of having an investment, the performance of which is dependent on the stock market. You are less likely to suffer from negative equity because your mortgage balance will be reducing month on month.

Assuming your property has not dropped in value, as the capital repayed increases you will see an increase in the level of equity in your property. Consequently, when you remortgage or move home you may find it easier to obtain a mortgage and you may be able to avoid paying a Mortgage Indemnity Guarantee.

There are a couple of disadvantages. You would be unable to benefit from the stock market if it has performed well over the period of the mortgage. Therefore, there is no possibility of being able to pay off your mortgage early with such an investment windfall or receiving an additional lump sum at the end of the repayment period.

If you move house after a few years, you will often have to repay your existing loan and take out a new one. Since most of the repayments in the early years consist of interest on the existing balance, not a huge amount of capital will have been repaid from the original debt. Many people end up taking out another twenty-five year loan, especially if you are trading up to a higher value property. This once again puts you at the start of the repayment schedule, meaning that the bulk of your repayments are once again being taken up with servicing the interest bill on the mortgage debt.

Buy-to-let Mortgage Guide

Although the owner-occupier housing market is showing signs of quieting down, the popularity of property as an investment grows. According to the latest report by the Association of Residential Letting Agents (October 2004), almost 60% of buy-to-let investors are planning to buy another property in the next year. But if you're buying to let, it pays to do your sums beforehand.

Buying residential property to let has become an increasingly popular investment choice. This is hardly surprising, given the recent upward surge in the property market. Buying to let allows you to borrow the lion's share of the property value. But you then keep the growth in the value of the whole property - not just your deposit. This process is known as 'gearing' and is the key to the attractiveness of buying to let.

Most people buying to let will need to take out a specialist mortgage. You will also need to put down a reasonable deposit - most lenders in this market will require at least 15% as a down payment, although many lenders are now asking for up to 30%.

The good news is there is now more choice in the buy-to-let mortgage market. Previously, landlords were forced to take out commercial mortgages that were more expensive, but nowadays almost every high street lender offers a buy-to-let mortgage of sorts.

If you have substantial equity in your own home, you may be able to look at remortgaging this and so obtain the funds to take out a small buy-to-let mortgage.

Because of the higher risks involved with letting out a property, buy-to-let mortgages are more expensive, although deals do vary. While you can expect to pay more than for your own residence, there are some very competitive fixed and discounted buy-to-let offers around.

Lenders take different approaches. Some will base the mortgage on your income in addition to the amount of rent they estimate can be obtained.

Some lenders will base the loan purely on the expected rental. The formula they use will also vary. Typically a lender will require the rent to be at least 130% of the mortgage payment. Others will offer a three times' salary multiple and half the rental income.

Others base the amount that they will lend on your salary and the existing loan commitments that you have, but then apply the 'deduction rule'. This means that they will lend up to 3.5 times your income (or whatever salary multiple applies), minus a representative figure for annual mortgage payments worked out at a pre-set level of interest. Say you earn £40,000 and have an outstanding mortgage balance on your property of £120,000. Under the rule, the annual mortgage repayments may be calculated as £10,000. This would be deducted from your salary to leave £30,000, which is then multiplied by 3.5 to give £105,000 - the amount that you are able to borrow.

Flexible Mortgage Guide

Flexible Mortgages have evolved on from the traditional UK mortgage model. A flexible mortgage is adaptable to fit your individual circumstances which means you can overpay, borrow back any overpayments, underpay and take payment holidays.

Most flexible mortgage deals allow you to change to another mortgage type without penalty. Your interest outstanding is calculated daily which means that as soon as you make a payment the residual interest due is immediately less.

The flexible mortgage was first successfully trialled in Australia in the early 1990's. In 1995 a couple of mortgage lenders realised that it would be a perfect fit for many people in the UK who had irregular work and lifestyle patterns.

Up till this time, borrowers had to choose from variable or fixed rate deals with no flexibility whatsoever. Penalties would often apply if payments were not made on time or if one wished to make an extra capital payment.

Now flexible mortgages are a well-established and accepted form of borrowing that allows the homeowner to have more control over his or her finances. There are of course varying degrees of flexibility on offer from providers, so carefully think about what kind of flexibility you require when you compare flexible mortgage products.

A new, popular form of the flexible mortgage is the offset mortgage. This is where interest on your mortgage is reduced by the funds in both your savings accounts and your current accounts. Even more evolved are flexible offset mortgages that bring together your mortgage, current account, savings account, loans and credit cards. The effect this kind of holistic financial arrangement can have on your personal finances is amazing.

Guide to Commercial Mortgages

A commercial mortgage is probably the best way to finance the purchase of buildings and land for business purposes - it provides the most flexible and affordable finance solution. With commercial mortgages, the lender has a legal claim over the property until the loan has been repaid in full.

Commercial mortgage loans can be split in two distinctive categories, "owner occupier" - the borrower is purchasing a business premises and "commercial investment" the borrower is purchasing property as an asset to rent.

The commercial mortgage market is characterised by complexities not present in the Residential and Buy to Let markets. The market in general does not feature the dynamic and highly competitive price points seen in the domestic market; however there are increasing numbers of lenders offering tranches of fixed rate money for small and medium sized loans.

Unlike simple calculation approach employed in the domestic market to make lending decisions, the commercial market is based around complex pricing models and the verdict of lending panels at each individual institution. All lenders, above a certain minimum loan value (normally £500,000), will go to the money markets and price up a transaction based on a bespoke margin and SWAP rate price (the rate banks and building societies lend each other money).

In simple terms, loan to property values are dependent on industry sector and proprietor circumstances in the owner occupier arena, and by the quality of tenant in the commercial investment market. In general however for small or medium sized loans a good yardstick for the borrower to consider would be an approximate maximum loan to value of 75%; however certain lenders will offer 80%+ loan to value in some cases.

Other banks will insist on a rental coverage ratio, i.e. the estimated rental should cover the mortgage payment by a certain percentage. 130% is an often-quoted ratio. For example the bank¹s valuer estimates that an office block will bring in £72,000 per annum in rent. Their rental coverage ratio is 1.3 (130%) which means the maximum annual interest amount on the mortgage will be £72,000 / 1.3 = £55,348. Assuming an interest rate of 6%, this means they will lend a maximum of £923,000.

The length of a commercial mortgage loan period will tend to be a maximum of 25 years and is often around the 15 year mark.

Borrowers should also be aware of the fees in the commercial mortgage market, typically there will a lender fee of 1% and a more expensive commercial valuation than would be applicable to a similarly valued residential property. Given the nature of the complexity of titles and covenants on many commercial properties, a higher legal cost will be incurred, not only through the borrower's own solicitor, but in many instances the lender uses their solicitor in parallel to validate the quality of the work, this cost also needs to be factored in.