Once you’ve agreed a purchase price and the property is sold subject to contract, you need to get down to the nitty gritty of structuring your mortgage. What’s most appropriate is dependent on your current circumstances and there are several components that can be manipulated to suit your monthly budget.
Components include loan-to-value, repayment method, mortgage term, initial term and rate type. These terms are often thrown around and not always explained which can add to the confusion for first time buyers and those especially.
Each time you remortgage, you can have flexibility in the above so if your circumstances have changed, allow your mortgage to change with them. Whether that’s easing monthly cashflow or increasing your repayments!
This blog will aim to explain the above terms and the options within each of these.
Your loan to value is simply the percentage of your property value which is mortgaged. Eg: If your property is worth £100,000.00 and you have a £10,000.00 deposit, the mortgage forms the remaining £90,000.00 of the value and your LTV is 90%.
You can manipulate your LTV by changing how much deposit you put down or the level of equity you have in your property. Generally, the lower the LTV, the lower the interest you will pay on your mortgage.
Capital Repayment – The mortgage balance decreases as the debt is being repaid as well as the interest on the debt each month. Payments are higher than on interest-only. Typically, people will have their residential mortgage for the property they live in on a capital repayment basis. This ensures the mortgage is repaid at the end of the mortgage term.
Interest-Only – The mortgage balance remains level as only the interest is being paid each month. Payments are lower than on capital repayment. Typically, people will have BTL mortgages for rental properties on an interest-only basis. This maximises the monthly profit made on the investment.
Part and Part – This is a combination of the above. Part of the debt is being repaid each month but at the end of the mortgage term there will still be an outstanding debt.
Your mortgage term is the primary component which will determine your monthly payments on a capital repayment mortgage. The longer the term, the lower the monthly payments. This is because you are spreading the debt over a longer period. This will incur more interest, so it is advisable you chose the shortest term which provides affordable monthly payments.
Mortgage terms can be as long as 40 years however lenders will require evidence of income into retirement if you want to borrow past your planned retirement age.
Your initial term can be 1, 2, 3, 5, 7 or 10 years long. The majority of products in the mortgage market however are over 2 or 5 years. The initial term can be a tool used to provide security in your monthly payments and flexibility in your life plans. They can also be a way for you to take advantage of present interest rates or prepare for changes that may be coming…
The appropriate initial term is closely linked to the rate type you choose as different rate types may tie you in to the mortgage for your chosen initial term. For example, a 5-year fixed rate mortgage will likely mean you are tied to the lender for five years unless you can pay an early repayment charge. However, a 2-year tracker mortgage will likely allow you to leave the mortgage within those two years without having to pay an early repayment charge.
Fixed – Your interest rate can be fixed for a specific period (your initial term). This provides security in your monthly payments. It means if interest rates rise, your payments won’t increase for the initial period. However, if interest rates fall, you will be stuck paying more than you could be.
The following options are all examples of different variable rate mortgages. Theses mortgages are not fixed and therefore do not provide security in your monthly payments. However, they often allow you to leave the mortgage within the initial period without incurring an early repayment charge, hence providing greater flexibility.
Tracker – Your interest rate is a set amount above the Bank of England Base Rate
Discount – Your interest rate is a set amount below your mortgage lenders SVR
SVR – Your interest rate is determined by your mortgage lenders standard variable rate. This is often a very high rate and is typically the rate you will revert to once your initial period has ended if you do not remortgage. Cap and Collar rates are SVR mortgages with a set rate which the interest cannot go above or below respectively. If you’re on SVR, get in touch to see if we can get you off it!
There can still be additional flexibility beyond what we’ve explained regarding cashback, associated fees, portability, early repayments charges, overpayments, offset features and more! There is no one perfect mortgage for all circumstances. For free, professional advice on how to get the most out of your mortgages, get in touch and we’ll be happy to see what we can do for you.