Mortgages

So what are the different types of mortgages?

Edward Gatheral from Mortgage Advice Bureau looks at the different types of mortgages available today.

Fixed Rate
The most common type of mortgage. A fixed rate mortgage has an interest rate and monthly repayment that will stay the same for a set period regardless of what happens to interest rates.
Deals are typically between two and five years, although it is possible to get a fixed term from seven years, up to ten years or more.
Advantages:
• Payments will not increase throughout the term of the fixed rate period.
• Ideal if you want to budget every month and know exactly what you are paying.
• Protection against interest rate increases.
Disadvantages:
• Difficult to get out of within the fixed term unless you pay a redemption figure which can be set at anything from 2% to 5% of the outstanding mortgage.
• If interest rates drop, you will not benefit.

Standard Variable Rate Mortgage (SVR)
A standard variable rate mortgage offers an interest rate set by the lender which is usually slightly higher than the Bank of England base rate. The base rate is the interest rate that will be charged once an initial deal period on a fixed or tracker rate mortgage comes to an end.
With an SVR mortgage you need to be aware that your mortgage payments could change each month, going up or down.
Advantages:
• If interest rates drop, your monthly payment should decrease.
• Easy to switch deals and you can leave at any time as there are normally not early repayment charges.
Disadvantages:
• This type of mortgage will not be suitable if you want to budget each month.
• The lender may not react quickly to a drop in interest rates.

Tracker Mortgage
A tracker mortgage is a type of variable rate mortgage which tracks the Bank of England base rate. With a tracker mortgage, the mortgage repayments could change every month.
Advantages:
• If the interest rate it is tracking drops, so will your mortgage payments as a result.
Disadvantages:
• Early repayment charges maybe applicable if you want to switch before the deal ends.
• If the rate it is tracking increases, so will your mortgage payments.

Discounted Variable Rate
A discounted variable rate mortgage is similar to a tracker mortgage except rather than being linked to the Bank of England’s base rate, it is linked to the lender's standard variable rate. The SVR can change at the lender’s discretion and the monthly repayments will go up and down as a result.
Advantages:
• The rate starts off cheaper, which will keep monthly repayments lower.
• If the lender cuts their SVR, your payments will be less each month.
Disadvantages:
• Budgeting can be difficult as the lender is free to raise the SVR at any time and if Bank of England base rates rise, the discount rate will increase too.

If you would like to explore which type of mortgage will suit your personal circumstances contact us and we can put you in touch with an independent mortgage adviser for a free, no obligation chat.

by Suzie Phillips

Top 10 Tips When Applying for A Mortgage

Taking out a mortgage is most likely to be the biggest financial commitment you will ever make, so you will want to find the best deal you can, and these tips will hopefully give you the best opportunity to do that.

Here are ten top tips from Edward at Mortgage Advice Bureau to help you find the mortgage you want: -

1. Budget
It is wise to work out your budget before applying for a mortgage, you of course want to be sure you can borrow enough to cover the purchase of the property, and you also need to ensure you have enough funds to cover the other costs and fees associated with buying a house, such as legal fees and stamp duty.
Monthly mortgage repayments depend on how much you borrow and over how long a term, along with the interest rate charged on the amount you borrow.

2. Stick to the same job
Mortgage lenders like to see stability and the longer you have been in the same role with the same employer, the greater your chances of being accepted by a lender are, so if you are thinking of switching jobs it would be best to hang on until you have your mortgage in place.
Usually, it is preferable to have been in your existing job for at least 3 to 6 months before making a mortgage application, although there are some lenders who will be happy with one payslip. Other lenders will not lend to you if you are in a probation period, although if you have a good employment history prior to your new employment, then some lenders will be happy with this.

3. Payslips at the ready
Mortgage lenders will want to see proof of how much you earn, so at the very least you will need to provide payslips if you are employed. The very minimum number of payslips required is one, although this will limit the lenders who will consider your application, some will want at least three.
Along with proving your income, you will also be required to submit your last three months bank statements, so it is very important to ensure your salary is paid into your bank account and that you manage your finances well.

4. If you are Self-Employed
Getting a mortgage when you are self-employed can sometimes be tricky, and do be aware that it will not be possible for you to apply until you have at least one years’ accounts.
The minimum amount of proof if you are self-employed will be at least one years SA302 and a corresponding tax year overview, however this will limit the lenders you can apply to as the majority will want to see at least two years.

5. The bigger your deposit, the better!
The more you can save up to put down as a deposit, then the greater choice of mortgages will be available to you, especially if you have a 10% deposit or more. A bigger deposit means you will be offered a better interest rate, so I advise you to save for as much as you can before you decide to buy a property.

6. Check your credit score
Before applying for a mortgage it is worth getting a copy of your credit report at Check My File which includes information from credit reference agencies such as Experian, Equifax, Trans Union & Crediva.

The information on your credit file is exactly what lenders see when they review your mortgage application, so it is therefore essential to be upfront on your application as lenders will be able to view everything financially associated with you, including bank accounts and credit cards. They will also see your adverse credit history for the last 6 years, including CCJ’s and default payments.

If you have a low or poor credit score there are simple things you can do to improve your score, an easy one is to check that you are on the electoral roll for your current address as this is where lenders will check that you live where you say you do.
It sounds obvious but many people miss payment deadlines because they forget – ensure you pay your bills on time by setting up direct debits or standing orders to ensure payments are always made when they should be.

Close any old credit card accounts that you no longer use.

7. Clear as much debt as possible
If you are submitting a mortgage application, the last thing any prospective lender will want to see is that you have several active credit cards, loans or a car finance agreement all with considerable monthly repayments.

The amount of debt you have and are able to maintain in a lenders eyes is relative to your income, for example, if you receive a net pay of £2,000 every month and have a credit card balance of £2,500 (lenders will assume 3% as the minimum payment), it will not affect your mortgage chances as this level of debt is considered to be manageable against your income. Conversely, if you had multiple credit cards with a high combined balance this will highlight an issue to the lender that you potentially live off credit and could offer you less choice, particularly with the high interest rates that are associated with credit cards. If you manage your debt well or it is low in relation to your income, then some lenders will accept that, so be careful not have a high amount of outstanding credit.

The same applies to car finance agreements, for example, if you pay £200 a month towards a car, then it will most likely not affect your affordability, while a monthly commitment of £400 or more against the same monthly income will impact your affordability. Lenders can be sympathetic and understand that people need to purchase cars with finance, however it is best to be sensible, it would be best that you don’t go and buy a Porsche on finance prior to applying for a mortgage if much of your monthly income is going to go towards repaying it.
Before you apply for a mortgage, do your best to reduce any debts you have and maintain your regular monthly payments, it is vital you can demonstrate to a lender that you manage your money responsibly to make any mortgage application you make more likely to be accepted.

8. Joint application
It is hard saving for a deposit on your own, if you decide to buy with another person – be it a good friend or partner, you can combine your deposit savings, along with both of your incomes (providing the additional applicant has an income). Always remember that you will both be responsible for the mortgage repayments, so it is vital to ensure you are both ready for this commitment.

9. Can family help?
If you are struggling to get that deposit together, it can be worth asking family to help contribute to your deposit in the form of a gift. There are also options such as Guarantor mortgages or Family Assist mortgages.

10. Where to go from here?
It is daunting to know where to begin with so many options out there, so if you don’t know where to start, it might be prudent to enlist the help of a mortgage advisor who can research the market for you, not only will this ensure you get the best deal but they will help and support you through the whole application process.

by Suzie Phillips