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Guide to Mortgage Types, Purchase Methods and Repayment Strategies

  • August 23, 2023

Stepping into the world of homeownership can be daunting with a lot of new terms. Understanding the various mortgage types can be overwhelming so here is a guide to the basics.

Overview

This guide is designed to provide clear insights into essential mortgage information. In this article, you will learn about:

    • Mortgage Types: We detail the characteristics of fixed-rate, tracker, and discount mortgages, helping you evaluate their respective advantages.
    • Methods of Property Purchase: We explain standard purchasing methods, the Joint Borrower Sole Proprietor (JBSP) approach, and the Shared Ownership scheme.
    • Repayment Mechanisms: We distinguish between repayment and interest-only mortgages, highlighting the implications of each for your financial future.

By comprehending these essential elements, you will be better prepared to make informed choices in your journey towards home ownership. Lets jump in.

Mortgage Types

Fixed Rate Mortgages: The Predictable Choice

Your interest rate remains unchanged for a specific period, offering stability in unpredictable markets.

    • Example: Secure a 5-year fixed rate mortgage at 3%, ensuring your rate remains consistent for that duration.n
    • Pros:
      • Stability: Your monthly payments won’t vary, making budgeting more manageable.
      • Market Protection: Even if interest rates rise in the broader market, yours will stay the same, potentially saving you money.
    • Cons:
      • Potential Missed Savings: If market rates plummet, you won’t benefit from the drop while on a fixed rate.
      • Early Exit Fees: If you decide to move or remortgage before the fixed term ends, you might face significant penalties.

Tracker Mortgages: Going with the Market Flow

Your interest rate is pegged to an external benchmark, typically the Bank of England’s base rate.

    • Example: With a tracker set at the base rate plus 1%, and the base rate at 0.5%, you’d pay 1.5% interest.
    • Pros:
      • Potential Savings: If the benchmark rate drops, you could see reductions in your monthly payments.
      • Transparency: Your rate changes are foreseeable, as they directly relate to a public benchmark.
    • Cons:
      • Economic Vulnerability: If the benchmark rate rises significantly, so do your repayments.
      • Budgeting Challenges: Fluctuating rates can make it hard to predict future monthly expenses.

Discount Mortgages:

These offer a reduced rate below the lender’s standard variable rate for an initial period.

    • Example: Secure a 1% discount off a 4% standard rate, and you’ll pay only 3% for the introductory period.
    • Pros:
      • Initial Savings: The reduced introductory rate means lower payments at the start of the mortgage.
      • Potential Further Reductions: If the lender’s standard rate drops, you’ll benefit from an even lower rate.
    • Cons:
      • Post-Discount Spike: After the introductory period, your rate might jump significantly.
      • Variable Uncertainty: Even within the discount period, if the standard rate rises, so will your payments.

Ways to Buy

Standard Mortgages: The Conventional Route

Provide a deposit, and borrow the remainder.

    • Example: For a £250,000 home, deposit 10% (£25,000) and secure a mortgage for the remaining £225,000.
    • Pros:
      • Full Ownership: You own 100% of your home from the outset, allowing for potential property value growth.
      • Equity Building: As you pay down the mortgage, your equity in the property increases, enhancing your financial standing.
    • Cons:
      • Potential Negative Equity: If property values decrease, you could owe more than your home’s worth.
      • Substantial Deposit: Saving for a sizeable initial deposit can be challenging.

Joint Borrower Sole Proprietor (JBSP) Mortgages: A Collective Effort

Multiple parties back the mortgage, but only one person’s name appears on the property title.

    • Example: Emily’s salary falls short for her dream flat. Her parents co-sign the mortgage, yet only her name graces the property title.
    • Pros:
      • Bypassing Barriers: This arrangement can help those with limited credit histories or incomes to still secure a mortgage.n
      • Greater Borrowing Power: Combining financial resources can lead to better mortgage terms or a larger loan amount.
    • Cons:
      • Shared Liability: All co-signers are jointly responsible for ensuring the mortgage is paid, even if one party defaults.
      • Relationship Strains: Money disputes or repayment issues can cause tensions between parties.

Shared Ownership: Ownership in Stages

Initially purchase a percentage of a property, and rent the remainder.

    • Example: Jamie aspires to buy a £300,000 flat. With only a £150,000 mortgage approval, he opts for Shared Ownership, acquiring 50% of the flat and renting the rest.
    • Pros:
      • Flexible Upgrading: Over time, you can buy more shares in the property as finances permit.
      • Stepping Stone Approach: Enables you to own property in stages, reducing the initial financial burden.
    • Cons:
      • Resale Restrictions: Selling a shared ownership property can come with additional conditions and potential complications.
      • Dual Payments: You’ll manage both a mortgage payment and rent, which can be a financial juggle.

Repayment Structures

Repayment Mortgages: Tackling Principal and Interest

Your monthly payments cover both the interest you owe and the principal mortgage amount.

    • Example: On a £200,000 mortgage at 3% interest, your monthly payments would reduce the outstanding balance and the interest accruing on it
    • Pros:
      • Potential Interest Savings: Since the principal decreases over time, the amount of interest you pay over the mortgage’s life can be less than with interest-only options.
      • Full Reduction: Each payment chips away at the total mortgage debt, ensuring the loan will be fully repaid at the end of the term.
    • Cons:
      • Higher Monthly Payments: Since you’re covering both interest and principal, monthly instalments are generally more substantial than interest-only mortgages.

Interest-Only Mortgages: Addressing Only the Interest

You’re only responsible for the interest that accumulates on your mortgage.

    • Example: On a £200,000 loan at 3% interest, your monthly payments would cater solely to the interest, leaving the principal untouched.
    • Pros:
      • Investment Opportunities: With the savings from reduced payments, you have the flexibility to invest elsewhere, potentially achieving higher returns.n
      • Lower Monthly Outgoings: Paying only the interest results in smaller monthly payments, freeing up cash for other investments.
    • Cons:
      • Total Cost: Over time, you might end up paying more in interest since the principal doesn’t decrease.
      • End-of-Term Balance: The principal remains undiminished, requiring a substantial lump sum payment at the end or another strategy to address the debt.

In Conclusion:

With an array of mortgage options available, understanding each type’s nuances can guide your decision. Remember to weigh the benefits against potential risks, and seek expert advice if in doubt.

At Compton Financial Services, we don’t merely facilitate a mortgage; we act as your trusted guide throughout the entire journey rather than just get you a mortgage. Recognising the challenges many first-time buyers face, we’re committed to ensuring clarity and confidence in your decisions.

Your home is at risk if you fail to keep up payments on your mortgage or any other loans secured against it. Buy to Let mortgages are not usually regulated by the Financial Conduct Authority.

Compton Financial Services Ltd is an Appointed Representative of New Leaf Distribution Ltd. who are authorised and regulated by the Financial Conduct Authority. Number 460421. Head Office 165 – 167 High Street, Rayleigh, Essex SS6 7QA. Co registration Number 5520001.