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Independent Mortgage & Protection advice for…

 

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  • First Time Buyers
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Different types of mortgage schemes & how they work

Fixed Rate Mortgages

 

A fixed rate mortgage is simply a means of guaranteeing your mortgage payment over a set period.

 

Fixed rates are for an initial period, typically anything from a year to 10 years. After the fixed rate period ends your mortgage will go onto a variable rate – most normally a tracker rate, or your lender's Standard Variable Rate. During the fixed rate period your payment will remain the same, regardless of what variable mortgage interest rates do.

 

So while you are protected if rates go up, you'll be paying over the odds if interest rates fall during the fixed rate period.

 

Fixed rate mortgages normally have an Early Repayment Charge if you want to remortgage or repay your mortgage during the initial fixed rate period.

 

This said, most fixed rate mortgages will allow you to make overpayments, typically up to 10% per year.

 

Tracker Mortgages

 

Tracker mortgages are basically a type of variable rate mortgage. What makes them different from other variable rate mortgages is that they follow – track – movements of another rate. Most commonly the rate that is tracked is the Bank of England Base Rate. Tracker rates can be for an introductory period – anything from 1 year to 5 years – or be a lifetime tracker, which means that you'll be on it for the whole term of your mortgage.

 

If you're on an introductory tracker rate, your mortgage will usually go onto a Standard Variable Rate or another (usually higher) tracker rate at the end of the initial term. So a tracker rate follows another rate. It can track below the rate it is following, but more commonly it tracks at a percentage above it. As the rate is variable, you benefit from lower payments when rates are low, but will suffer from higher payments if the rate being tracked goes up.

 

Introductory tracker rates can be amongst the very lowest mortgage interest rates available. However, like all variable rates they can go up as well as down. Also most introductory tracker rates will most likely have an Early Repayment Charge if you remortgage or repay the mortgage during the introductory period. If you're on a lifetime tracker mortgage there will sometimes be an Early Repayment Charge for a period after you take it out.

 

Most tracker rate mortgages will let you make overpayments without charging an Early Repayment Charge – usually you're allowed to overpay up to 10% per year.

 

If you've come onto a tracker rate after being on an introductory fixed or tracker deal, there aren't normally any Early Repayment Charges if you want to overpay, remortgage or pay off the mortgage early (although check with your lender prior to making any decision). It's become more common for some mortgage lenders to put a collar rate on their tracker mortgages. A collar rate basically means that your rate can't go below a certain, minimum level. So if the rate being tracked goes below the collar rate, your payments won't go down any further

 

Discounted Mortgages

 

 Discounted mortgages offer a discount off a certain interest rate – most commonly a lender's Standard Variable Rate.

 

The discount can be for an introductory term of 2, 3 or 5 years, or it could even be for the entire term of the mortgage (a lifetime discounted rate). A discounted rate is a type of variable interest rate – so your payments can go up and down. They work by offering a set discount off a lender's Standard Variable Rate (SVR). So if the lender's SVR is currently 5.00% and the discounted rate offers 1.00% off this, you'll start out paying 4.00%. Then, later on, if the SVR goes up to 6.00%, your discounted rate would go up to 5.00%. If the SVR goes down by 1.00%, so your discounted rate would go down by 1.00% also. To see when a lender might increase or decrease their Standard Variable Rate (and therefore any discounted rates linked to it. When your introductory period comes to an end, you will most likely go onto your lender's Standard Variable Rate properly.

 

Discounted rates tend to make an Early Repayment Charge if you pay off the mortgage, or remortgage to another lender during the introductory period. However, most will let you make overpayments – normally 10% of the outstanding balance per year. If you have a lifetime discounted mortgage, the Early Repayment Charge will probably not apply for the full term of the mortgage, but for an initial 2-5 year period. Collar rates are becoming more common since interest rates have hit all-time lows.

 

They basically mean that the mortgage rate, and so mortgage payments, can only go so low. So if a Standard variable Rate was reduced to a level that sent the discounted mortgage below the collar, your payments would not go any lower than the collar rate.

 

Help To Buy

 

Help to Buy is a government scheme which could make getting on to, or moving up, the housing ladder more accessible. It helps existing home owners and first time buyers purchase a home with as little as 5% deposit.

 

There are two ways to purchase a property up to the value of £600,000 using Help to Buy:

 

Mortgage Guarantee or Equity Loan

 

Mortgage Guarantee - available on both pre-owned and new build properties with a standard mortgage of up to 95% of the purchase price.

 

A mortgage supported by the Help to Buy: mortgage guarantee scheme works in exactly the same way as any other mortgage except that under the scheme the Government offers lenders the option to purchase a guarantee on mortgage loans.

 

Because of this support, lenders taking part are able to offer home buyers more high-loan-to-value mortgages (80-95%).

 

You will still be fully responsible for your mortgage repayments. So if you have a 5% deposit, you will need to take out and pay back a 95% mortgage.

 

Example: for a home with a £200,000 price tag

 

Example

 

Below is a quick checklist of who is eligible for the scheme:

 

  • Available to both existing home owners and first-time buyers
  • Buyers need a minimum of a 5% deposit
  • Available on all previously owned and new build properties up to the value of £600,000
  • Must be your only property
  • Available for properties in the UK
  • Borrowing from a participating mortgage lender

 

Equity Loan - available on new build properties in England only, using a government equity loan of up to 20% of the purchase price plus a traditional mortgage.

 

How does it work?

 

With a Help to Buy: equity loan the Government lends you up to 20% of the cost of your new-build home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. The Equity Loan scheme is only available from approved, participating house builders.

 

The home will be in your name, which means you can sell it at any time. However, as this is an equity loan, you'll have to pay back the loan amount when you sell your home or at the end of your mortgage period - whichever comes first. The amount to be paid back is 20% of the sale price, which may be more than the original loan amount depending on whether your home has increased in value whilst you have owned it.

 

  • Available on new build properties only up to the value of £600,000
  • Equity loan scheme, using a government equity loan of 20%, which will need to be repaid on sale of the property
  • Must be your only property
  • Buyers need a minimum of 5% deposit
  • Available to both first-time buyers and existing home owners You won't be charged loan fees on the 20% equity loan for the first 5 years of owning your home. In the 6th year you will be charged a fee of 1.75% of the loan's value, which will increase every year by the retail price index plus 1%.

 

Example: for a home with a £200,000 price tag

 

Example

 

If the home in the example above sold for £210,000, you’d get £168,000 (80%, from your mortgage and the cash deposit) and you’d pay back £42,000 on the loan (20%). You’d need to pay off your mortgage with your share of the money. Your home may be repossessed if you don not keep up repayments on your mortgage

 

Your home may be repossessed if you don not keep up repayments on your mortgage

 

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Wisemove Property & Financial Services Ltd is authorized and regulated by the Financial Conduct Authority for residential mortgages and non investment insurance business. We are entered on the FCA register No. 301881 at www.fca.gov.uk/register/home. Registration Number 4910696. All fees will be subject to VAT. Our VAT Number is 883 2855 86.

 

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

 

The Financial Conduct Authority does not regulate some aspects of buy to let mortgages.

 

The guidance and/or advice contained within the website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK. We provide a link to the FCA consumer website http://www.fca.gov.uk/consumer/keyfacts/index.html 

 

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