Mortgage Types / Jargon Busting
Lee and Neezam bust some jargon and break down the different types of mortgage.
Approved by The Openwork Partnership on 14th February 2023
What’s a fixed rate mortgage?
That’s quite an easy one – it’s where you’ve agreed a fixed interest rate on your mortgage deal for a set period of time. Your monthly payments will be protected from any rise in interest rates for that amount of time.
What’s a variable rate mortgage?
A variable rate mortgage has an interest rate that can change – it can go up or down. Usually you fall onto a variable rate once a fixed rate deal ends. Each lender has their own variable rates.
What’s a tracker rate mortgage?
A tracker rate mortgage is a type of variable rate. It is a rate that can go up or down which means your monthly payments can go up or down as well. A tracker usually will track the Bank of England base rate, so if the base rate moves up or down then your payments will go up or down to mirror it.
What’s a discounted rate mortgage?
It’s another type of variable rate mortgage, typically. You can get discounted fixed deals but discounted variable rates are generally what you tend to find. They are in effect variable rates but with a discount. It could be that the lender’s standard variable rate is 5% but they’re giving you a discount of 2%, so your interest rate is 3%.
What’s an offset rate mortgage?
An offset mortgage will always come with a savings account. Let’s say, for example, you’re borrowing £100,000 on a mortgage. Your mortgage debt is £100,000 but if you put £100,000 into a savings account as well, the interest on the mortgage will be zero. The savings offset the mortgage balance.
If you then took £50,000 out of the savings account you’re effectively down £50,000 because your mortgage is £50,000 above the savings account. You pay interest on any difference between the two. It sounds complicated, but in fact it’s really straightforward. It really suits some people who don’t want to tie up their cash.
What’s the difference between capital repayment and interest only?
Let’s say you have a £100,000 mortgage over 25 years. On a capital repayment mortgage, you’re repaying the balance of the mortgage as well as the interest. So at the end of the 25 years you’ll have a balance of zero.
With Interest Only, you will just repay back the interest on the mortgage. So after 25 years you will still have £100,000 left to pay.
What is a flexible mortgage and how do they work?
A flexible mortgage can cover a number of different things. It may be that you can port the mortgage, come out of it early, or have more flexibility around paying the mortgage itself.
A flexible mortgage is quite a loose term and there are a few specific benefits, which we’ll come onto.
How does cashback work?
If a lender is offering a cashback incentive, usually the idea is that it covers the legal work for remortgaging. What normally happens is that the lender will give you, say, £500 cashback payable on completion – which means that when your solicitors request the mortgage funds, the lender transfers across the mortgage funds plus an extra £500. The solicitor normally takes their money out of that, then whatever is left – if anything – will come to you.
Some lenders say that the cashback is payable after your first mortgage payment. In that case they’ll just transfer that across into your account. You can get all sorts of different cash back amounts and deals depending on the lender and product.
Can you explain overpayment?
One of the benefits of a flexible mortgage is that you can overpay. Most banks will allow you to overpay by up to 10% of the mortgage balance per year. With a flexible mortgage that limit might be anything from 30% to unlimited overpayments.
That means you can make as many overpayments as you like without a penalty. A flexible mortgage can be useful if you’re coming into some inheritance or you’re selling a property and you really want to overpay your mortgage. A flexible mortgage could be more suitable because it doesn’t have the same limits as a normal mortgage.
How do payment breaks work?
We don’t see payment breaks quite as often as overpayments. We all saw during the pandemic that a lot of people took mortgage payment holidays, and this is a bit like that.
It gives you a certain period of time where you don’t have to pay the mortgage payments. Generally speaking, we advise not to do that unless there’s a good reason. Some lenders will only offer you payment breaks if you’ve built up enough surplus funds through overpayments.
If you’ve previously made overpayments throughout the year that equate to, say, three months ‘ worth of mortgage payments, they might allow you to take a payment break for three months. Obviously any savings you made through the overpayments will be negated through the payment breaks. It’s not something we see very often, but that’s generally how it works.
What is porting?
Porting is where you can move your current mortgage product to a new property. Let’s say for example, you buy a property with a mortgage from Halifax and it’s a five-year fixed. Then two years later you decide to move house. You’re tied into the mortgage product and there are likely to be penalties to come out early. One of the benefits of porting is you don’t have to come out of that mortgage product.
You can port the mortgage product to a new property: you can keep your Halifax deal and move it across to the new home. It’s a good benefit if you’re thinking about moving home.
What is a Joint Borrower Sole Proprietor Mortgage?
We’ve actually done a whole specific episode on this there’s a page on our website on it. So I’m not going to dive into loads of detail.
Joint Borrower Sole Proprietor (JBSP) is what most people know as the old Guarantor Mortgage. We’ll break the name down – so ‘joint borrower’ means that there’s usually more than one person borrowing on the mortgage, so more than one income is being used to calculate the loan amount. Proprietor means owner, so it means that there’s only one owner for the property.
The most common example with JBSP is where a parent helps their son or daughter get on the property ladder by borrowing the mortgage with them. They’re applying jointly for the mortgage funds, so mum or dad’s income helps with affordability.
But at the same time, the parent may not want to be on the deeds of the property for various reasons. One of the most common is that they would incur an additional stamp duty rate if they already own a property. So because it’s a sole proprietor mortgage, the son or daughter on their own will be the owner. It’s the best of both worlds. There are lots of pros and cons to this, so head over to our JBSP page to look into it further.
What is Shared Ownership?
Shared ownership is a great way to get on the property ladder. In effect it’s part mortgage, part rent, so you buy a share in a property. The scheme is good for those who may be buying on their own and don’t have the capacity to buy a whole property.
It could be that their earnings aren’t quite enough or they don’t have a sufficient deposit. All you would need to do is get a mortgage for your share.
So let’s say for example, a house is worth £200,000 and you bought a 50% share in this property. You would only need a mortgage for £100,000. So your mortgage would be smaller and your income and your earnings would not need to qualify you to borrow £200,000.
For the other 50% that you don’t own, you would pay rent for. It’s a really good way of starting to own a property. The other half is owned by the housing association. Again it’s something that you probably need to speak to a broker about to understand the pros and cons in detail.
What is Right to Buy and Right to Acquire?
The Right to Buy scheme and the Right to Acquire scheme are aimed at council and housing association tenants in the UK. It allows you to buy your home for a heavily discounted rate, if you’ve been renting a home from the council or a housing association for a number of years.
The size of the discount depends on how long you’ve rented the property for. Your housing association will make an offer to you and then you need to get a mortgage. Some lenders don’t actually need you to put a deposit down because of the discount. Again, we’ve done a whole episode on Right to Buy and Right to Acquire, so take a look at that page for more info.
Are there any other mortgage terms we need to know about?
We’ve covered a lot of it. I’d just like to share something from my point of view. Recently I had a phone call with a client and the first thing they said to me was “Getting on the property ladder is just not possible. I don’t think this is going to be worth your time.”
We went through the various schemes – we’ve only named a few here. But picking the phone up and understanding what is possible makes such a difference. That client is now going to look at properties this weekend.
So don’t just think that you can’t get a mortgage – pick up the phone and see what your possibilities are. There are a lot of schemes available to help First Time Buyers or people moving home, and there’s lots of incentives out there. So contact us to find out – it could get you jumping on the property ladder or moving home.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS