Your Mortgage Options Explained

When you start looking at mortgages, the choice can seem overwhelming - terms like 'Fixed Rate' and 'LTV' can be confusing. How can you possibly know whether you've got the right mortgage to suit you and your circumstances? Our handy guide below helps to clear up some of the confusion.

The first step in understanding your mortgage options, is to know exactly what a mortgage is. A mortgage is a loan, secured on a property, that is repaid with a predetermined set of payments over an agreed period of time.

How much can I borrow?

The amount you can borrow depends on your income, outgoings, and individual situation. You can get an idea of what you could borrow with our Mortgage Calculator, but for more detailed figures speak to one of our mortgage and protection advisors.

If you want to apply for a mortgage with a second person, we will usually consider your joint incomes.

Once we have talked to you about a mortgage, we can give you a Mortgage Affordability Certificate, showing how much we will lend you if the valuation of the property is satisfactory. The valuation provided is for mortgage purposes only and may give a brief description of any obvious problems. We will arrange the mortgage valuation to help us decide whether the property is suitable for the mortgage you need.

What are the different types of mortgages available?

There are two types of mortgage products - fixed rate and variable rate.

With a fixed rate mortgage, your interest rate is fixed, so won’t change, for a set period of time. Generally, this would be for 2 or 5 years and will mean you continue to pay the same amount each month for your fixed period, if you continue to make all your payments on time.

As the name suggests, with a variable rate mortgage your interest rate, and therefore your payment, may change each month. You might have heard of tracker or discount mortgages too. These are variable rate mortgages as well, they just have different names. The difference in name relates to which benchmark interest rate the product is linked to. Products are linked to the Bank of England’s base rate or to the lender’s SVR (Standard Variable Rate).

Variable rate is the umbrella term that discount and tracker products come under. Normally, you can get a discount product for 2 years or 5 years.

Fixed or variable rate mortgage - what is the difference?

Put simply, a fixed rate gives you peace of mind in knowing your mortgage payment will be the same each month, but normally the interest rate will be higher than an equivalent variable rate. It’s a bit like paying for an insurance policy to guarantee your payments for a specific period of time.

Variables are the opposite. They are usually cheaper than fixed rate and if interest rates go down your payment will follow. But if rates go up, you could end up paying more.

If your monthly budget is tight and you couldn’t afford, or wouldn’t want, your mortgage payment to go up then a fixed rate might be better for you. On the other hand, if you could afford for your payments to go up, or if, for example, you thought interest rates were going to drop, then a variable rate may be a better product for you.

There are other factors and differences in each product that may influence your decision too – things like overpayments, moving house or paying your mortgage off early. This is where speaking to a mortgage advisor will help you to understand the options available.

How do I pay my mortgage?

Capital repayment of a mortgage involves repaying the loan gradually over an agreed period of time. Each monthly payment you make consists of two parts - interest on the outstanding capital/loan and repayment of part of the capital (capital is the original amount borrowed for your mortgage) on the loan.

Most of your monthly payment in the first few years simply covers the interest with only a small amount going towards repayment of the capital. The capital part of your monthly payment will, however, increase as the mortgage term and the amount of the loan outstanding reduces.

Provided you keep up your monthly payments the loan will be repaid at the end of the agreed mortgage period. With this type of mortgage, it is recommended that you take out sufficient life assurance to repay the loan if you should die before the end of the mortgage term.

The amount of interest you pay will normally vary dependant on the rate of interest applicable. Or you might opt for an Interest Only mortgage. More about this can be found below.

What is an interest only mortgage?

An interest only mortgage is exactly as it sounds - your monthly mortgage payment covers the interest on the loan. To put this another way, your payment doesn’t pay anything off the capital (the amount you borrowed in the first place). If you borrowed £150,000 on an interest only basis over 25 years, at the end of the 25 years you would still owe £150,000, providing you have made all your payments on time. You’d therefore need to have some way of repaying this amount off at the end of the term.

The monthly payments for an interest only mortgage are cheaper when compared to a repayment mortgage (which is where you pay off both interest and capital each month). It might also suit people who have an asset that they can cash in to repay the capital when the mortgage finishes. This could be something like a second property, pension lump sum or investment policy. You might hear this referred to as a “repayment vehicle”. Your mortgage company will check how you’ll pay the mortgage off.

As with all mortgages, there are factors to take into consideration with an interest only mortgage. With an interest only mortgage there is a risk and no guarantee your mortgage will be paid off at the end of its term, as there is with a repayment mortgage. This could be because your investment policy or pension, used as a repayment vehicle, may lose value or not be worth as much as you had hoped.

Additionally, it can be harder to get an interest only mortgage than a repayment mortgage. Many mortgage companies have tighter rules for interest only mortgage so generally you’ll need a bigger deposit and bigger income than usual. You are also unable to use a “speculative” repayment vehicle, such as an inheritance that you might get in the future.

There’s a lot to consider with an interest only mortgage. This is where a mortgage advisor can help you to understand the options and whether you’d meet the criteria to qualify.

What is a 95% mortgage?

A 95% mortgage* allows you to buy a house with a deposit of only 5% of the purchase price, rather than having to continue to save for a 10% or 15% deposit. 95% mortgages are great if you don't have a big deposit.

You should be aware that with a 95% mortgage, the interest rate you pay (and therefore your mortgage payment) will be higher than if you save for a bigger deposit. The rule is the bigger deposit the lower the interest rate. Only you’ll know when the trade-off between deposit and interest rate is right for you.

*95% mortgages are subject to lending criteria at the time