As the interest rate will fluctuate, this type of mortgage makes it less straight forward for you to budget. While you will benefit if interest rates fall, you will also be worse off should they rise.
Dependent on how low the lenders base/variable rate is and with many other products available, it may be in your interest to move to a mortgage with a special rate, such as a fixed, capped or discounted product to protect against future rises.
But before you rush out to buy a second property, make sure you do your research first. You need to make sure that you select a property in the right location. Not only that, you have to make sure that you choose a property that will suit your target market. So there is no point in purchasing a penthouse suite if you want to let it out to students!
Once you have decided on the property to purchase, you will find that many lenders offer specific mortgages for properties that are being brought to let. There are many types available – including both repayment and interest only – but what makes the products distinctive is the criteria lenders use to calculate the amount you can borrow. Rental yields are usually around 125% of the mortgage payment but some lenders have different ratios and some will allow 100% rental yield but charge a higher arrangement fee instead. Generally these days you now need a 25% deposit/equity in the property. Also fees can be very high, so be prepared to pay these or have them added to your loan.
If you’re thinking of buying a property as an investment, please run it past us first and we can hopefully make that decision easier for you.
Capped rate mortgages are obviously attractive if you suspect that interest rates may rise at some point. They are available for a wide range of terms, ranging from a few months to the length of the mortgage itself.
Capped mortgages are usually more expensive than their fixed rate counterparts. So, therefore if interest rates did not fall below the capped rate during the term, then you would have been better off with a fixed rate mortgage. There may also be redemption penalties attached to these products, so make sure you know what these are before committing to this type of mortgage. Capped mortgages also tend to have collars on them these days which means that they can not go below as set rate (usually 3%) aswell.
Very often cashback offers are accompanied by redemption penalties which tie you to them for several years. Some lenders do offer small cashbacks to help cover costs and fees, which are usually repayable if you should leave them within the first 2 years.
This means that you have immediate access to your mortgage account and can pay in more, or less, with ease. Interest is charged daily, so any changes you make will have an immediate impact on your mortgage balance.
A current account mortgage is also a useful way of saving money that you may otherwise put away elsewhere. It makes more sense to pay less for your mortgage than to be taxed on your savings. And because a current account mortgage is not considered by the government to be a savings vehicle, you are not taxed on your deposits.
You need to be disciplined if you have a current account mortgage. Just as it is easy to pay into your mortgage, it is equally simple to spend your equity. Careful management is required to make sure that you mortgage balance is constantly reducing; otherwise you may never pay it off!
As with fixed rate mortgages, discount mortgage terms typically last between 6 months and five years. The level of discount will vary too, usually according to the length of term.
This type of mortgage, especially the shorter term products, are popular with those who move house and want to spend money in the first few months on home improvements. They are also popular with those who want a few months to recover from the expenses incurred when purchasing a new home.
After the discount term has ended you will automatically revert to the lender’s standard variable rate. This could come as a shock, especially if you have been enjoying a significant discount. To get round this, you may choose to re-mortgage at the end of the term, perhaps selecting yet another discounted product.
Watch out for any penalties attached to a discounted product. Lenders may charge you if you decide to switch mortgages before the discount term has ended.
Two Types of Equity Release Mortgage Schemes…
So what should a first time buyer do? Firstly you should try to save as much deposit as possible, currently lenders will lend upto 90% of the property value, though if you put down more deposit you are likely to get better rates. Though there are specialist homebuy schemes and shared equity accomodation if you qualify – contact your local council for ones that may be in your area – with these you may only need 5% deposit.
There are other ways of getting onto the property market, i.e. with a parent as guarantor or even as a shared mortgagee ( you can have upto 4 applicants on one mortgage now), call us to discuss these option.
The attractions of this are that it makes it easy for you to plan your monthly outgoings, as your mortgage payments will remain constant during the fixed-rate term. Not only that, it also protects you against any rise in interest rates during that time.
On the other hand, you will miss out if interest rates fall. Unfortunately, if this happens then you can’t simply switch to a more favorable rate. Lenders frequently impose penalties on borrowers who change their mortgage before the fixed-rate term has come to an end. Some penalties are more punitive than others, so make sure you check these before committing yourself. Occassionally we also get access to 15/20 year fixed rate mortgages.
The main benefit of a flexible mortgage is that you can increase, or decrease, your monthly payments as and when you wish without incurring any penalties. This is particularly attractive if you are in employment where you receive bonuses, or if you are self-employed and your monthly income fluctuates.
Interest is usually calculated on a daily or monthly, rather than yearly, basis, so any overpayment you make immediately reduces your mortgage balance. By regularly overpaying your mortgage it is therefore possible to repay it early, saving you thousands of pounds in interest.
In order to underpay your mortgage, or take a payment holiday, lenders will require you to have built up an equivalent level of credit through overpayment first. You should also be able to borrow back the amount you have overpaid at any time. During in the term of a special rate you may be restricted to 10% overpayments per annum without penalty, terms differ from lender to lender.
As an incentive, some lenders offer to pay for your valuation fees, arrangement fees and legal costs. Sometimes these are refunded, so you have to pay for them in the first place and the lender will forward you the money when your mortgage application has completed. Other times these are actually free, so you do not pay for them at all; the lender takes care of that.
There may be some restrictions, however. Sometimes a lender will insist you use a particular solicitor or surveyor in order to receive a free service, or to obtain a refund. For most people this does not pose a problem, but it is something that you should be aware of. Also be aware of redemption penalties where you have to pay back the free incentives should you leave the lender.
If you want to raise extra money for any purpose (providing its for a legal reason) you can, this could also mean consolidating all your debts and saving more money monthly but bearing in mind that you will now be spreading the cost over the term of the mortgage and therefore possibly paying more in interest. Again we will advise on the best solution 4 U.
There are a variety of lenders that offer these now and someitmes allow you to borrow extra should you wish to improve your home.
Quite often the council or housing association ascertain their own value (which is usually less than the market value) and then give you a discount of this and that is the proce they are offering to you for.
The lenders we have access to will actually use the market value to lend in most situations.
Please be aware that like mortgages, councils have penalties too, and if you try to sell the house within 3 or 5 years you have ot pay back some of the discount.
This is where the lender tracks Bank of England by a set amount i.e plus 1% or minus 0.5%, so whatever happens to bank of england you will always be a set amount above or below it for a set period.
Most often they are a lot lower than the lenders variable rate.
These have the same benefits and drawbacks as a variable and discounted rates in that your monthly amount can go up or down.