Mortgage

Residential Mortgage

A mortgage is a loan taken out to buy property or land. Most run for 25 years but the term can be shorter or longer. The loan is ‘secured’ against the value of your home until it’s paid off.  The money you borrow is called the capital and the lender then charges you interest on it till it is repaid. The type of mortgage you are able to apply for will depend on whether you want to repay interest only or interest and capital.

There are different types of Mortgage interest rate available

Fixed interest rate/ stepped fixed  –  The mortgage has a ‘fixed’ interest rate, so you pay a set amount each month for the duration of the fixed period.  This allows you the security of knowing your exact monthly commitments in the early years of the mortgage, unaffected by changes in the underlying interest rates.  If interest rates fall below the fixed rate you will, however, continue to pay the higher, fixed amount.

Variable interest rate  –  The mortgage has a variable interest rate which can rise and fall in line with market conditions.  This does involve a degree of uncertainty as your monthly repayments can vary and increase but will allow you to benefit from a fall in interest rates.

Discounted variable interest rate  –  The mortgage has a discounted variable interest rate.  This does involve a degree of uncertainty as your monthly repayments can vary and increase but it allows you to have a discount on your mortgage payments for a specific period and to minimise your monthly payments, it also allows you to benefit from a fall in interest rates.

Tracker mortgage  –  The mortgage has a tracker interest rate.  This means that the interest rate is linked to the [Bank of England Base Rate/LIBOR] and is equivalent to that rate plus a certain percentage.  This does mean that your monthly premium may vary and can increase and therefore involves a degree of uncertainty, but this does allow you to benefit from a fall in interest rates.

Capped rate – The mortgage has a capped interest rate which means that the lender has put a “cap” on the maximum interest rate that can be charged.  It provides the security of knowing that your monthly repayments will not rise above a certain amount, whilst allowing you to benefit from any drop in the rate below the cap. 

Buy to let Mortgage

Business buy-to-let (BTL) mortgages are for landlords who buy property specifically to rent out.  They are usually more expensive than residential mortgages, but they could help you become a property investor.  Buy-to-let mortgages are only suitable for people who want to invest in houses and flats.  They are in many ways just like residential mortgages, but with some key differences:

  • Interest rates on buy-to-let mortgages tend to be higher
  • The minimum deposit for a buy-to-let mortgage is usually a quarter (25%) of the property’s value (some lenders offer deals with a 20% deposit, others want a 40% deposit)
  • The level of borrowing is typically based on the level of rental income
  • A 3% stamp duty surcharge applies, which applies to the entire purchase price of the property

Most BTL mortgages are interest-only, which means you don’t pay anything off the lump sum borrowed each month but, of course, at the end of the mortgage term you need to repay the capital owing in full.

Source: Threesixty LLP Online 2019

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