Mortgage Guide
Saving Interest for
Landlords and Investors
TYPES OF MORTGAGES
Our mortgage guide provides a summary of the main classes of mortgages available to Landlords and Property Investors in the UK. There are currently many types of mortgages available on the market and the variations are numerous and can be confusing.
WHAT IS A MORTGAGE?
A mortgage is:
”.. an agreement under which a person borrows money to buy property, esp. a house, and the lender may take possession of the property if the borrower fails to repay the money... the deed effecting such an agreement” - Collins English Dictionary.
Interest Only
As the name implies, mortgage payments made are for interest only. Frequently chosen by Landlords and Investors as it reduces monthly payments to a minimum. The loan would be repaid in a large payment made at the end of the mortgage life.
Advantage: Small monthly payments.
Disadvantage: A very large capital payment to be made at the end of the mortgage.
Repayment Mortgages.
This is different to Interest Only Mortgages in that each monthly payment pays both the interest due on the loan in that month and some of the capital (principal) of the loan. At the end of the term you would have paid off the mortgage in full and own the property outright.
Advantage: You pay less in interest over the lifetime of the mortgage. There is no large payment to be made at the end of the term.
Disadvantage: Monthly payments are larger than for the interest only mortgage. Money used to repay capital could be used more profitably elsewhere.
Flexible Mortgages
These mortgages allow you to vary the capital amount on your mortgage up to your initial amount borrowed. The amounts you pay monthly can be adjusted such that you pay more than the interest charged in the month or less than the interest charged (or even not pay for a certain number of months). If you required it, you may be allowed to take money out of your mortgage account up to the initial amount lent.
Advantages: You can pay as much or as little in a particular month.
Disadvantage: The interest rate is calculated daily on the amount owed. The interest rate charged is normally higher than the variable rate.
Fixed Interest Rate
These have a fixed interest rate covering a fixed term typically 2 to 5 years at a fixed interest rate that changes to a variable rate automatically after the end of the fixed term.
The advantages are that you know what payments you will be making over the fixed rate term of the mortgage life; if interest rates go up your interest payments during the fixed rate term remain the same.
The disadvantage is that if interest rates fall, you will be paying more that you would have on a variable rate mortgage.
Variable Interest Rate.
This interest rate varies in line with the Standard Variable Rate as determined by the lender. It may be expressed as Bank Base Rate + x%.
The advantage is that you are always paying interest at the market rate (assuming that the market works in your favour).
The disadvantage is that if the market rate went up, the interest payments may be more than you are able to pay easily. A very large capital payment is to be made at the end of the mortgage.
Tracker
This mortgage is similar to the Variable Interest Rate Mortgage as outlined above. The difference may be in that it is linked to different market rates e.g. LIBOR (London Interbank Offer Rate) + x%.
Advantages are similar to the Variable Interest Rate above.
Disadvantages are similar to the Variable Interest Rate above.
Capped Rate
This interest rate is similar to the Variable or Tracker rates except that the maximum interest rate that can be charged has been previously set. Hence the name capped.
Advantages. These are useful if you want the certainty of not having to pay more than the agreed capped rate while taking advantage of any reductions in interest rates.
Disadvantage. The interest rate charged by the lender may be higher that their other variable rate mortgages.
Discounted Rates
These are rates at which the lender charges at an x% discount from their normal variable rate or tracker rates for a set period in the life of the mortgage.
Advantages. You have a smaller monthly payment for a while.
Disadvantage. There may be stiffer penalties if you have to repay the mortgage during the discount period or for some time after the end of the discounted period (known as a tie-in or overhang).
Cashback
The lender gives you a lump sum cash payment when you take out the mortgage. The interest charged is normally variable.
Advantages. You get a sum of money at the start of your mortgage.
Disadvantage. There may be stiffer penalties if you have to repay the mortgage during the discount period or for some time after the end of the discounted period (known as a tie-in or overhang).
Why Remortgage?
There are four reasons why you would remortgage a property:
1. The original mortgage is coming to the end of its term.
If it is an interest only mortgage. You may not have the cash to repay the mortgage.
If it is a repayment mortgage you may want to use the equity in the property in a more profitable way.
2. To release any increased available equity in the property to be used elsewhere.
This allows you raise cash without having to sell the property (which also avoids capital gains taxes which would be payable if the property is sold).
3. To manage the size and/or payments related to the mortgage on the property.
You would do this by taking advantage of any favourable offers available at the time you are remortgaging. You may make capital repayments or borrow a larger amount than you owed. You may switch from a repayment to an interest only mortgage or vice versa. To reduce the size of monthly repayments another method would be to increase the life of the mortgage, this would only be applicable to Repayment Mortgages.
4. To save money.
You would do this by carefully selecting from the mortgage offers available at the time. Many factors have to be considered (e.g. redemption penalties, Mortgage Indemnity Guarantees, survey and legal fees, rent to interest chargeable). Therefore ensure that you take appropriate independent professional advice.
If you have a high Loan To Value mortgage on your property, mortgage interest and/or capital payments would probably be your biggest monthly payment that you would be making for that property.
The total interest payments add up to a lot of money over the lifetime that you own the property. You can save a FORTUNE if you keep these interest costs low.
Using a Mortgage Broker or Packager
A good mortgage broker would help you to get a great mortgage deal quickly.
Some brokers get paid from fees chargeable to you. Others from the mortgage lenders that they have placed your business with. The ones that charge you fees for their services should be able to select from a wider range of mortgage providers. Some mortgage providers may not pay the broker the procuration fees. However, you could ask for any procuration fees to offset the fees that the broker charges.
A mortgage packager is slighty different and is invaluable when you have a portfolio of properties. Mortgage packagers will help save you a lot of time and effort by almost doing the application for you. They can fill out the forms, collate employers or accountants references and information from them, arrange for valuations and conveyancing with solicitors. The mortgage packagers will know the specific requirements of lenders, will present the required information to have the best chances of success. They will have access to special deals and packages not available to smaller brokers.
We use mortgage brokers or packagers. They have been very useful, especially when refinancing our portfolio as there is such a lot of paperwork and co-ordination to be completed.
Wendy Ong
FSA Register Number 304101
Total Mortgage Network Ltd
Drake House
Langstone Business Park
Newport. NP18 2LX
Mob: 07985 988 987
Wendy is always very professional and efficient allowing us to concentrate on investing and managing our portfolio.
This mortgage guide information does not constitute financial advice under the Financial Services and Markets Act 2000. If you require such advice, you should seek appropriate professional advice.
