A mortgage is a kind of loan or credit. This loan is specifically taken or given against a property or other building. This loan is required to be paid over a specified period of time, 25-35 years in most cases. According to property resources, there are many different types of mortgages available in the financial market. You are free to select the one which will suit your requirements and your budget. In general, mortgages are defined by how interest is applied to the loan and how that loan is repaid.
What are the different types of mortgages?
Adverse Credit Mortgage
There might come a time when you need to borrow money, but you have a credit history that does not inspire too much confidence. It makes you think twice before you act. For such borrowers, an adverse credit mortgage is the answer for all their troubles. So to put it succinctly, this type of mortgage is for those who have a poor credit history or a poor credit rating as it is sometimes called. Adverse credit mortgages are also known as sub-standard mortgages, because the interest rate is not very competitive, and as a general rule is on the higher side. It is a poor cousin of the other mortgages available in the market. It is also known by various other names like, non-status mortgage, bad credit mortgage ,sub-prime mortgage, credit-impaired mortgage or poor credit mortgage. Reference: (http://www.mortgagefriendly.net/mortgages/adverse-credit/)
A person’s bad credit history is a resultant of numerous causes. Some of the prominent amongst them are bankruptcy, I.V.A, trust deeds, prior mortgage or rent liabilities, and many more. In such cases, borrowers have to apply for a mortgage through professionals called subprime lenders. As more and more people emerge who have an unsound credit history, so have emerged subprime lenders. It is a pure case of demand and supply. The supply keeps pace with the demand. Lenders catering to the needs of people with adverse credit have seen a rapid increase over the years, and the idea has taken hold to such an extent that even mainstream lenders are getting into the act.
Money lending is a risky business, and a bank goes through the credit history of a prospective borrower in some detail, before lending him/her money. Their primary concern is getting their money back with the interest accrued. This is the reason why some lending organisations simply do not lend to borrowers who come under the high-risk category. But, there are others who adjust their interest rates on the higher side and give you the requisite loan. More often than not an adverse credit mortgage involves the paying of interest rates on your mortgages that are much higher than ordinary. Thus it prevents fraud & helps both, moneylenders as well as credit takers to improve upon their ratings. This is the prime reason why more & more people are applying adverse credit mortgages.
Adverse credit mortgages have their positive side too. Do consider the point that at the end of the day, you do get a house that you can call your own. Moreover, if you repay the mortgage in the designated time frame, your credit history sees a turn for the better. Adverse credit mortgages have come like a breath of fresh air for those wanting to take mortgage. This type of mortgage has given a fresh lease of life to people who want to fulfill their dreams. Not only it prevents fraud but is seen as a cure for bad credit history. The only thing that was standing between these people and their dream was a bad credit history. Adverse credit mortgages have made poor credit history, history!
There are instances where a mortgage is jointly purchased by two people such that the property is under their names. This is particularly common in marriages, relationships, partnerships and even general friendships where two or more individuals come together and decide to join the effort to enable them to get a property that a single individual would probably not afford. This is referred to as a joint mortgage, and it’s not uncommon to find several couples taking this option. Due to the changing economic conditions which affect market rates, it is possible that the jointly held property can get into negative equity. This raises a complex situation when it comes to determining who should take responsibility and be held liable for amending things.
It becomes worse when the negative equity sets in at a time when the joint is not firm enough, and so there are pending issues like divorce and separation. However difficult the situation can get, the sad reality is that the negative equity has to be dealt with and all dues owed to the lender must be paid. A few options would help deal with such situations involving a joint mortgage, negative equity.
Refer To The Agreement
It is in such situations that the agreement signed at the onset of the mortgage becomes crucial and you will have to refer to it. Since you took the mortgage as a joint arrangement, it must have been reflected in the agreement alongside accompanying terms and conditions of the joint mortgage. In most cases, the agreement should specify that the joint holders of the mortgage are fully responsible for all repayments until the total sum of the mortgage is totally cleared. If this specification was clearly indicated in the agreement, then it becomes obvious that every party will be expected to attend to the negative equity.
This may proof non-viable as an option if your joint engagement was not put into any legal structure and all you did is a discussion about it; so the mortgage was registered under one name. This is common in circumstances where the involved individuals trust and believe in one another so much that they cannot imagine any issues in the future. In such a case, the option of referring to the legal agreement will not help that much. Reference: (https://mojomortgages.com/learn/article/how-joint-mortgages-work)
An endowment mortgage, in theory, is supposed to lower your mortgage payment. Ideally, endowment mortgages are much cheaper than standard mortgage policies such as repayment mortgages. When you get an endowment mortgage, you pay only the interest on the amount borrowed. In addition to this, you pay an additional small sum into a policy that is supposed to be ever-increasing: the endowment policy. This policy is supposed to grow and grow, and at the end of the mortgage term, you use this money to pay off your capital.
An endowment mortgage is actually not a legal term. This type of mortgage policy was popular in the 1980s, especially in the UK, but natural fiscal problems and stock market lows made many of these policies practically worthless. An endowment mortgage is always going to be hit or miss. When they work, they really work well. When they don’t work then, things aren’t so great.
With an endowment mortgage, the borrower only pays the monthly interest to the lender while investing an additional monthly sum into a policy that is usually invested in equities. The theory is that this “endowment policy” should grow sufficiently, with long-term share price rises, over the course of the mortgage (usually 25 years) that the capital debt can be repaid at the end of the term. REFERENCE (http://lexicon.ft.com/Term?term=endowment-mortgage)
Buy To Let Mortgage
Buy to Let mortgage is a type of loan used for purchasing property which you can let out to rent after getting the ownership. Especially in the UK, Buy to Let properties have become quite popular. While some people are seasoned investors, others look at it as a source of income. Let’s discuss the various aspects of the Buy to Let mortgage investment route.
Benefits Of Buy To Let Mortgages
- Firstly, the new property bought for renting becomes a steady source of income.
- A Buy to Let mortgage allows the owner to enjoy a long-term accumulation of capital growth with the purchased property.
- A Buy to Let mortgage allows the property owners to benefit from any rise in the value of the property
- Landlords will not feel the pressure of the mortgage payment as it can be easily covered by the rent paid by the tenant
Reasons Behind The Popularity Of Buy To Let Mortgages In The UK
Buy to Let mortgages have a number of other advantages which have made them popular among property investors, such as:
- Increasing demand for good rental property for both commercial and personal use.
- Up to 85 percent of property value can be borrowed from various lenders who deal in Buy to Let mortgages.
- As compared to other mortgages, Buy to Let comes with lower interest rates.
- Various lenders are offering competitive and customised Buy to Let deals for buying property.
- It is a safer long-term investment for investors as compared to unpredictable stock markets
- This mortgage can be borrowed by a group of private individuals
- One can select the repayment option in a Buy to Let mortgage in the form of interest only or capital repayment
- Buy to Let mortgage repayment periods may vary from 5 to 25 years
- With a single Buy to Let loan, one can even think of purchasing more than just one property.
While purchasing a Buy to Let property might seem like a good option, it’s essential to invest in the right property and secure the best mortgage available. There are various online companies in the UK, who have made the process of selecting a mortgage very easy. To help you to get the best deal in Buy to Let mortgage, they usually offer a wide range of borrowing options from where you can choose one that suits your financial condition. REFERENCE:( https://www.permanenttsb.ie/mortgages/buy-to-let-mortgage/)
If you have decided to get a reverse mortgage on your home the next big decision you will have to make is how to choose the right reverse mortgage lender. There are many out there to choose from, but how do you know which ones are the best. Keep reading this article to uncover some great tips on how to choose the right reverse mortgage lender that will meet your needs. The Home Equity Conversion Mortgage is the most common type of reverse mortgage.
The other type of reverse mortgage lender can be a state-funded lender. The cash received from these reverse mortgage lenders will usually have stipulations on how you can spend the money. The money will be given to you in one lump sum, but it must be spent for home improvement, to pay taxes or some other pre-approved expense.
Proprietary reverse mortgages are offered by banks or lending institutions. The money received from these types of lenders is able to be used in any way that you want. But proprietary reverse mortgages are usually the most expensive. If you live in a higher value home, you may be able to borrow money. It’s essential to compare the benefits of a proprietary reverse mortgage and a more traditional of a HECM.
When you begin your search for a reverse mortgage lender, do so with caution. There are many good mortgage lenders out there, but there are some dishonest ones also. Always check out a reverse mortgage lender thoroughly before you agree to anything.
Another option would be to enlist the aid of a reverse mortgage lender association. Do a search on the Internet, and you can find a few associations that will aid you in finding a reputable reverse mortgage lender in your area of the country.
If you are worried about how you are going to be able to stay in your home, consider getting a reverse mortgage. You will make no payments on the mortgage during your lifetime or while you still live in your home. You will be able to get the cash to create a cushion in case of a medical bill. Do the analysis to find a great reverse mortgage lender today.
Base Rate Tracker Mortgage
Tracker mortgages are mortgage deals with a variable interest rate which tracks the Bank of England base rate. The interest paid will remain at a set percentage above or below the base interest rate for the length of the offer.
In the past, it was easy to get a tracker mortgage with the interest rate below the base interest rate, indicating that people who took out tracker mortgage deals set at 0.5 per cent below base interest rate found themselves paying zero interest on their mortgage when the rate fell to 0.5 per cent.
When is the best time to have a tracker mortgage?
It is best to have a tracker mortgage when the base interest rate is very low because you will be paying lower interest on your borrowing as a result. You need to consider the benefit of paying low interest at these times against the risk of being subject to increased interest payments when the rate increases. The larger your mortgage is, the larger the risk.
When is it a bad time to have a tracker mortgage?
Depending on your deal, a tracker can be a good mortgage at any time, depending on the particular mortgage deal you have entered, although of course, you benefit more from a tracker when base rates are low. However, if your mortgage deal specifies an interest rate which is fairly high above the base, you may find yourself in a worse position when base rates are high.
It is hard for anyone to know for sure what will happen to the Bank of England base rate. Every month, the government’s monetary policy committee reviews the base rate and decides whether to keep it the same, increase it or decrease it. Their decision will be based on a variety of factors connected to issues such as government policy and the current state of the economy.
However, there are plenty of people in the world of finance willing to make informed predictions about base rate fluctuation so reading up on the economy can give you an edge on understanding what is likely to happen, a mortgage advisor will probably also be able to make things a lot clearer. REFERENCE: (https://www.charcol.co.uk/mortgages/best-buys/best-tracker-mortgage/)
With the Interest Only Mortgage (IOM), as the name suggests, only the mortgage interest will be paid every month, with the capital payment intact. Under this type of mortgage your monthly payments will be less than on a Repayment Mortgage, though the notion is you should be making a second monthly payment into an investment vehicle so, at the end of the fixed term, you can pay the capital off in a lump sum to the mortgage lender. Reference: (https://www.comparethemarket.com/mortgages/information/interest-only/)
Advantages And Disadvantages
With IOMs, the positives and negatives are related; many of the subjects involved are two sides of the same coin. For instance, IOM’s are more vulnerable to market forces than Repayment Mortgages are, but depending on what the market is doing it can be a boon or a bother. An interest rate rise would be the best example, a £100,000 mortgage over 25 years with an interest rate change of 1% would lead to an increase of £65 on a repayment mortgage, but £84 increase on an interest-only mortgage. Yet the benefits are as embraced as the drawbacks are not, if interest rates go down by 1%, the payments fall by the same quantity as stated above.
Not only can the payments vary over a far-ranging spectrum than Repayment Mortgages, but the monthly repayments are more bendable than on a Repayment Mortgage, as you are only paying the interest on the mortgage, the payments each month are lower, on a £100,000, 25 years mortgage, for instance, you would be saving 2k a year on mortgage repayments. What is not advertised about an IOM is that in truth you should be saving into a secondary investment vehicle, generating enough cash so, at the closing of the mortgage, you can pay the lump sum, which is the actual capital, off to the mortgage lender.
So an IOM is if truth be told, only cheaper if you if you decide not to make the second payment, some people do go down this route, gambling on the expectation that by the time it comes to pay the lump sum off, house prices would have risen enough to pay off the mortgage and have enough left over to scale down into a smaller house. It’s easy to forget the fact that all other property prices will have also increased, risking any profit you had created not being enough even to scale down. The only time gambling on house price inflation is expected to work is if the property is a buy-to-let, as you would be profiting on and covering the rent, and could then sell the property to repay the capital, another factor is that if interest rates are as low as they are at present, those on IOMs don’t work by, and large realise they should be making further payments into the investment vehicle to make paying the lump sum off easier in the future. An IOM also results in you, in reality, paying more cash over the 25 years than a Repayment Mortgage; those on a Repayment Mortgages are paying capital which reduces interest over time, IOM capital is unchanging as the capital is not being reduced. Which leads to the final downside of an IOM, the property will not gain any equity during the time of the mortgage.
If you choose an interest-only mortgage deal, this means that you are paying off the interest on the money you have borrowed, but none of the capital, for the duration of the term. With a repayment mortgage deal, however, you will be paying off some of the capital every month, as well as the interest accumulated on the total amount.
Most people who take on a mortgage do choose repayment mortgage deals. According to the Council of Mortgage Lenders, 74% of mortgages taken out were repayment mortgages. They are the simplest types of mortgage deals, and they carry the least risk.
For true self-certification mortgage products, the applicant does not need to prove their income fully. Rather, they make a declaration of income to the lender based on their past earnings and expected future earnings.
Self-certification mortgage products are growing in popularity as more people receive income in variable patterns and through non-standard forms such as bonuses and commissions.
Originally self-certification mortgage products were designed for the self-employed. The changing composition of the workforces has, however, meant that many employees could not fully prove their employment income as well.
Not having to fully prove income is believed by some analysts to increase the risk of over-borrowing and therefore repossession.
However, provided the applicant does not exaggerate their income on their self-certification mortgage application, they should only be approved to borrow the maximum amount they can afford to repay in accordance with the lenders’ criteria.
Additionally, lying about income on a self-certification mortgage application is a criminal offence, and more lenders are challenging applicants’ income declarations, reducing the likelihood of borrowing putting themselves at financial risk.
Interest rates are usually higher on self-certification mortgage products than for standard mortgage products, and loan-to-values can also be lower. This means the borrower will have to fund a larger deposit thereby increasing their initial investment in their own home.
This can act as an extra incentive for applicants to not lie about income. The moment the borrower risks his/her money, instead of borrowing 100% of the property’s value, they are more likely not over to borrow and increase the risk of repossession.
As the composition of the workforce shifts from more people becoming self-employed, self-certification mortgage products should continue to rise in popularity. It is estimated that a quarter of the UK’s population are already self-employed and have a difficult time to prove income, and this figure is growing.
Mortgage lenders have recognised this which is why self-certification mortgage products are so widely available on today’s mortgage market. Demand for self-certs should continue, and as a result, the products should become more competitive.
If you require a self-certification mortgage, you should contact an independent mortgage adviser for expert, impartial advice. REFERENCE: ( http://bit.do/eLWgu)
Capped mortgages are becoming more popular in recent years, although not many people understand how they work. The simplest explanation is that they are a cross between an adjustable rate mortgage and a fixed mortgage. But what is so special about a capped mortgage?
Those who are proponents of this type of loan agree that it is the best of both worlds. The interest rate is capped at a predetermined rate for a certain period of time. Should the base rate upon which the cap is layered go down, then the monthly payments would go down accordingly.
For example, if the base rate is 2.75 and the cap is 2.5 percentage points above the base, the current interest rate would be 5.25%. If the base goes down to 2.0, the interest will move down to 4.5% which on a monthly basis is considerable.
Take the other extreme. If the base rate goes to 3.25 and the initial was 2.75, then the interest rate would still be 5.25%, which is the cap rate, rather than the 6/0% common to an adjustable rate mortgage.
These loans are sometimes available with 25% down payment along with a processing fee similar to points but of a fixed amount. Rates can also vary depending upon whether they are capped or not. If there is no ceiling or cap, then the rate would be less.
In spite of the obvious benefits, particularly for someone in for the short-term loans, say under five years, the capped mortgage is not necessarily the most popular. The overwhelming majority of homeowners prefers to have a standard fixed rate 30-year mortgage and in some cases 15 years. The stability of maintaining the same mortgage payment every month is far more enticing then speculating on the forces within the market and the government that controls the base interest rate.
Capped mortgages are just a few of the numerous products available for home purchase in today’s marketplace. The savvy investor or even first-time buyer always has the most recent information at their disposal.
Fixed rate mortgage is popular on the market. It can be useful for the people whose mortgage obligation represents a good percentage of their earnings or first-time buyers. The advantage of knowing the level of the mortgage payment is more important than any profit gained from lowering interest rates.
Early Redemption Penalties
Early redemption or repayment charges, often equivalent to several months’ interest may apply for at least the duration of the fixed term. Sometimes redemption penalties will extend beyond the fixed term, depending on the lender. This is important in the case of long-term mortgages, where the prediction of a change in circumstances, leading to early repayment, is difficult.
Pros And Cons Of Different Types Of Fixed Rate Products
Lower monthly payments than a 10-year fixed rate mortgage
Payments are constant for 25 years.
Pay a higher interest rate than a 10-year fixed rate mortgage.
Payments stay the same if the base rate goes down.
10-Year Fixed Rate Mortgage
This has been popular among people who are refinancing their 25-year loan.
Lower interest rate than a 25-year fixed rate mortgage.
Build up equity faster than with a 25-year loan.
Payments are constant for 10 years.
Higher monthly payment than a 25- year fixed rate mortgage.
Payments stay the same if the base rate goes down.
If you are considering a fixed rate mortgage, be aware that arrangement fees or bookings are obligatory. The fees can be added to the total sum borrowed, but interest charges will be applied to this additional amount. Beware of high mortgage fees obscured by an apparently attractive APR.
Interest repayment is the mortgage element that has the biggest impact on the borrower’s monthly outgoings. The UK base rate is set by the Bank of England, subject to external factors, and unpredictability. When homebuyers borrow money, an obvious concern is the risk of unforeseen interest rate rises. It’s a very real possibility, no matter how stable the economy.
Fixed Rate Versus Variable Rate
Base rates are influenced by a variety of factors and fall as well as rise. The possibility of a fall in the base rate often tempts consumers to favour a variable rate mortgage. If interest rates fall significantly during a fixed rate period, a fixed rate mortgage may prove to be more expensive than a variable rate mortgage. If interest rates rise during the fixed-rate period, you will experience substantial increases in repayments, when the interest reverts to the standard variable rate, at the end of that period.
If you are buying your first home, moving into a new house or renewing a mortgage, regardless of your situation, selecting a fixed rate mortgage means that you will not have to worry about fluctuating interest rates for the term of your mortgage. A mortgage is categorised as a fixed rate if the interest rate is fixed for a certain period of time. The fact that the mortgage interest is fixed means that a borrower knows exactly how much the payments will be during the fixed rate period.
Advantages Of A Fixed Rate Mortgage
A fixed rate mortgage comes with a fixed interest rate for the entire, or a selected term of the mortgage. The major benefit of this type of mortgage is that you know what to expect since you know:
- The interest on your mortgage;
- The amount of your monthly mortgage payments;
- The distribution of payment between principal and interest;
- The amortisation of your mortgage.
Enjoy A Guaranteed Rate.
When you take out a new mortgage, your fixed interest can be guaranteed for a fixed period of time, usually around 90 days, before the date of completion of the purchase of your home. If the interest rates happen to rise during this period, you will still be entitled to the lowest rate that you agreed with the lender within the guarantee time period. Check with your lender, or your mortgage broker to see how long a lender will “hold” the interest for you at a fixed level.
The interest rates normally associated with a fixed rate mortgage tend to be higher than that of a variable rate mortgage. The rate is usually roughly around 1% higher than a variable rate mortgage.
Good In Rising Rates
A fixed term loan can be an excellent way to protect you from potential interest rises. If you feel that there is a strong likelihood that future rates are likely to rise then a fixed interest rate loan is an obvious choice as it protects the borrower from the loan getting more expensive at times of higher interest rates. However, remember that the loan can become costly if the rates are reduced and you are left paying a loan at a higher rate than the current interest rate. REFERENCE: (https://www.equifax.co.uk/resources/Mortgages/types-of-mortgage.html)
Financial trends and recent economic history can give a clue to possible base rate fluctuations, but the result is only an educated guess. Predicting variations in the base rate is very difficult. However, fixed-rate mortgages aim to take interest rate movement into consideration, by setting a fixed interest rate for a predetermined period. They are very useful in some circumstances, as long as the underlying principle and ramifications of a variable base rate are properly understood.
Deciding between mortgage types is not easy, which is why you need to talk to a qualified mortgage broker to help you pick the best product for you. You need to assess whether you want the security of knowing exactly how much you will pay monthly or you can afford to take a chance on a variable rate loan to benefit from any potential interest declines.