/ Mortgages

The complete list & guide to every type of Mortgage (First-time buyers)(2018)

As you might already know, there are different types of mortgages but even so, lenders continue to come up with unique mortgages in a bid to get more first time home buyers on the property ladder.

In this guide, we will go through all the different types of mortgages so you are armed with sufficient knowledge prior to shopping for a house. This will give you and indication on which type of Mortgage is best for you.

The Mortgage basics

Mortgages are loans given by lenders so you can buy a house. The house is used as collateral and mortgages up to 100% of the house value are available.

There are two main types of mortgages, these are repayment and interest only. Furthermore there are two categories which are fixed interest rates or variable interest rates.

What is a fixed rate mortgage?

Fixed rate mortgages are mortgages where the interest rate will not move and remains fixed. Lenders will usually offer this mortgage as an incentive to borrowers for an initial period such as 3, 5 or 10 years so to entice you.Your rates will usually switch to a variable rate( more expensive) after this initial period is over and that’s a good time to look into switching lenders for a cheaper rate or another fixed rate.

Advantages of fixed rate mortgages

They provide certainty as your monthly mortgage repayments remain the same for a fixed period of time.

Problems with fixed rate mortgages

If interest rates fall you will not benefit as you are locked in
If you want to switch deals to a better rate during your fixed rate period it will likely cost you early penalty charges
They usually have high arrangement fees ( between £2000 to £3000)

What are short term fixed rate mortgages?

Short term fixed rate mortgages are those which are issued for just the initial period of a mortgage as a way of enticing more borrowers onto the mortgage product. They offer for a fixed term between 1-5 years of the initial mortgage term after which the interest rate will usually switch to the lenders standard variable rate(a more expensive rate).

For this reason short term fixed rate mortgages should usually be switched towards the end of their term to prevent your mortgage interest rate from increasing and pushing up your monthly repayment. A suitable mortgage management platform will inform you of when you should switch in time.

What is a tracker rate mortgage?

A tracker mortgage is a type of variable rate mortgage: their interest rates can go up and down, they usually have no early repayment fees. A tracker rate mortgage follows the bank of England base rate. Tracker rate mortgages do not match the bank of England base rate exactly but rather they are the basis on which a margin is placed e.g England base rate plus 1.5% = tracker rate.

You can get a tracker rate mortgage for 1- 5 years or a lifetime tracker rate mortgage which will last the whole term of your mortgage. In most cases a lender will offer a tracker rate mortgage as an introductory offer for the first 3-5 years of the mortgage after which the interest rate will switch to a more expensive standard variable rate or another tracker rate with a higher margin

Tracker rate mortgages can have a positive or negative margin. This means they can be lower or higher than the base rate which they follow. Tracker mortgages which have a negative margin may also come with a collar rate which is a minimum rate to which the mortgage lender will allow the interest rate on your mortgage to fall.

Advantages of a tracker rate mortgage

  • Tracker mortgages are good if interest rates fall as these would reduce your monthly repayments.

  • Arrangement fees for a tracker rate mortgage tend to be quite low.

  • Most mortgage lenders will offer a switch and fix feature which essentially allows you to switch to a fixed rate mortgage in their mortgage product suite if the tracker rate goes up to a level you cant cope with. They will allow you switch at no cost to you.

Disadvantages of a tracker rate mortgage

  • If interest rates rise you could find yourself in a position where you can't afford your monthly mortgage repayments.

  • Due to how favourable tracker rate mortgages are they will usually have high costs to switch from. E.g the early repayment fees

  • Tracker rate mortgages with collar rates will not allow you to fully benefit if interest rates fall

  • Tracker mortgages might not allow you to overpay on the mortgage as well.This means they will prevent you from benefitting in any interest charge savings overpayment might provide you.

What is Standard variable rate mortgage? (SVRs)

The Standard variable rate is just like the tracker rate mortgage but the discretion on when and how it moves is in the hands of the Lender. In reality, they tend to move in line with the bank of England base rate. It is worth checking with a digital mortgage broker before making a decision as the rates very incredibly between lenders.

Critically, they’re the rate that most borrowers end up on after the end of an incentive(introductory) period such as a two-year fix or two-year discounted variable rate mortgage. Standard variable rate mortgages are risky as you don’t know when the lender will move its rates and they can move rates for commercial and economic reasons.

SVR mortgages are rarely available to new customers nowadays, and even if they are, they’re usually they’re not as competitive as other rates.

What is a capped rate mortgage?

A capped rate mortgage is a type of standard variable rate mortgage whereby a maximum interest rate cap is placed on the mortgage. If interest rates rise your mortgage interest rate cannot rise past the maximum capped rate.

If the Bank of England interest rates fall your lender might at their discretion reduce the interest rate on your mortgage.

Capped rate mortgages are usually part of an introductory offer to new borrowers as a way of enticing them on to a mortgage deal.

Advantages of capped rate mortgages?

  • You have a guaranteed maximum interest rate and hence monthly repayment for a set period of time.

  • Some lenders will give you a capped rate mortgage which acts like a tracker rate mortgage. This means it follows the bank of England base rate by a plus or minus margin but has a maximum interest cap.

Disadvantages of capped rate mortgages?

  • Once the capped rate period finishes you will no doubt be on a more expensive rate.

  • The costs of settling the mortgage and hence remortgaging will be high due to early repayment costs

What are interest only mortgages?

Interest only mortgage are mortgages where the monthly mortgage repayments include only interest payments and not capital repayments. The capital is repaid at the end of the mortgage term in one lump sum. This is contrast to a repayment mortgage where you repay both the interest and capital over the term of the mortgage in monthly repayments.

Interest only mortgages are loved by buy to let investors as they do not have to repay the capital but simply the interest and this allows them to gain more short term income and asset appreciation before disposing of the asset.

How does an interest only mortgage work?

With an interest only mortgage the lender will require you make separate agreements for paying back the capital at the end of the term(the lender will need to be satisfied with this) and the affordability assessments are different to those of a Capital repayment mortgage.

An interest only mortgage is more risky as there is a large capital requirement at the end of the term. And whilst it might seem like a much cheaper option in the short term it is actually a more expensive option as you never reduce the amount of debt you have borrowed during the term of the mortgage and so you are paying interest on a constant debt amount rather than a decreasing debt amount with a capital repayment mortgage.

Is an interest only mortgage right for you?

In the past, interest only mortgages were repaid with endowment policies but as the performances of those became worse it is now a less common method and probably will be rejected my a mortgage lender as a suitable repayment strategy.

The risk for most first-time buyers or investors with interest only mortgages is that if the property price were to fall they will find themselves with negative equity and no way to remortgage but rather stuck with a mortgage debt that is much larger than their property price.

Another big risk is the rise in interest rates which could skyrocket the monthly repayments and put first-time buyers in serious debt.

An interest only mortgage should only be taken where there is a credible plan to repay the debt and there is some plan to deal with a drastic rise in interest rates or fall in house prices.

Putting a large sum in a secure savings pot which can grow at the same or faster rate of interest which you are paying on your mortgage will go a long way to mitigate any risks down the road.

Older borrowers may also have the option to take a large sum out of their pension to pay for the interest only mortgage capital requirement at the end of the term.

In a worse case scenario the capital requirement could be paid of by selling the property. This of course only applies if the property price is higher than the outstanding debt and even at this it would have been a waste of time and money if your plan was to actually own a home.

First-time buyers seeking interest only mortgages as a short term option should be very careful as they might find themselves with no home and lost property.

Interest-Only Mortgage vs Repayment Mortgage?

What is a repayment mortgage?

A repayment or capital mortgage is where you repay the capital plus interest over the term of the mortgage in monthly repayments.

Your monthly repayments include both capital and interest. As you repay your capital, the interest you pay on your mortgage decreases. Initially most of your monthly repayments will go towards the interest on the mortgage but in time this settles off and becomes a similar percentage of each.With a repayment mortgage you repay the mortgage in full by the end of the term and as you are slowly repaying the capital every month you begin to own more equity in the property and can remortgage to a better deal in a few years as you will have a better LTV than when you originally got the mortgage. In a scenario house prices have risen(your property price), you will even have a better LTV and hence better rates for you.

**What are the key differences between the interest-only mortgage vs the repayment mortgage?
**

Monthly payments:

For interest-only mortgages your monthly payments will only include interest payments and no capital

For repayment mortgages your monthly payment will include interest payments and capital payments.

What happens at the end of the term?

For interest-only mortgages at the end of the term you will have to pay the capital in one lump sum.

For repayment mortgages at the end of the mortgage term you will own the property in full.

What is the monthly interest calculated based on?

For interest-only mortgages the interest is calculated on the capital which does not change throughout the term of the loan

For repayment mortgages the interest is calculated on the capital which is constantly reducing as the monthly payments are being made which include capital payments.

What is an offset mortgage?

An offset mortgage is a mortgage whereby your savings are used to reduce the amount of interest you pay on your mortgage. An offset mortgage works by linking a savings account to your offset mortgage. Interest is charged on the difference between your mortgage and the offset savings account. The more you deposit in the savings account the less interest you have to pay. You can withdraw the funds from your savings account at any time as there is no lock in period. This will ofcourse increase your interest payments.

The funds in the linked account can be deposited by friends of family.

An offset mortgage can help you;

  • Pay your mortgage off quicker

  • Reduce your monthly payments now or in the future

Is an offset mortgage right for you?

It is worth getting advice before choosing an offset mortgage from a qualified digital mortgage broker.

An offset mortgage will not pay you interest on your savings and should really only be used when interest rate earnings on your savings will be less than the interest rate repayments you will have to make on your mortgage in the same time period.

You can get a fixed offset mortgage or a tracker rate.

You can repay the offset mortgage at any time but the same early repayment charges may apply.

An offset mortgage can be incredibly cheaper way to get on the property ladder and allow you to pay off your mortgage quickly

What is a guarantor Mortgage?

A guarantor mortgage guarantees you will repay your mortgage by appointing a guarantor such as a family member to take on full responsibility if you fail to make your regular payments.
In a scenario where you default on the mortgage, your guarantor will be responsible for paying the whole mortgage debt in full. In some cases the lender will place a time limit or an amount to which the guarantor will be liable.

How do Guarantor Mortgages work?

A guarantor mortgage will allow a first-time buyer to borrow up to 100% of a property value as long as their guarantor guarantees a minimum 75% of the mortgage. A guarantor mortgage will usually rely on the guarantor placing their property as collateral against the mortgage. Their property could then be repossessed to recoup any losses the lender might incur due the borrower defaulting on the mortgage.

The cost of a guarantor mortgage is the same as with any other mortgage. The same mortgage fees apply.

Guarantor mortgages are good for people with;

  • Low credit ratings
  • Little or no deposit
  • Low Mortgage affordability

Who can be a guarantor?

A mortgage guarantor can be a family member or occasionally a close friend but different lenders have varying policies on this.

A guarantor will need to:

  • Have a good credit score
  • Own assets which can be liquidated to cover the cost of the mortgage incase of a default

Guarantor mortgages are very risky and hence both parties must always seek independent financial advice before applying for a guarantor mortgage.

What is a Flexible family mortgage?

The Flexible family mortgage is a scheme offered by the family building society, it assists first time buyers who have a 5% deposit with three options.The family building society will then provide a 95% mortgage.

The three options;

  • A family member can put 20% or more in a savings account which pays interest.This serves as a collateral for the mortgage.This helps reduce the amount of interest a borrower has to pay although they still get a 95% mortgage.

  • A family member can place a value of the mortgage in an offset savings account which reduces the amount of the mortgage which interest is charged on.This is also known as a family offset mortgage.

  • A family member can use some of the equity in their property as collateral for the mortgage.This is also known as the family deposit mortgage.

What is the Barclays springboard Mortgage?

The Barclays Springboard mortgage isn't considered a guarantor Mortgage but it kind of works like one. It works by allowing a family member to put 10% of the property price in a barclays Helpful start account for 3 years. Interest is paid on the money and it is returned (+interest) after 3 years although it may be held for a further period if you fail to keep up on your monthly mortgage repayments.The maximum house price you can use for a Barclays springboard mortgage is £500,000.

What is the Post office First start Mortgage?

The Post office first start mortgage is aimed primarily at those who don't earn enough to pass the affordability assessments of a lender. E.g you want to buy a £300,000 house, you have £15,000 saved(5%) and you will have to borrow £285,000 but you earn £25,000 per year which means you can only borrow up t0 4.5 of this amount which is £112,500.

In this case, the Post office First start Mortgage allows you to add a sponsor to your mortgage so their income can be included in the affordability assessment. Your sponsor must be family or close relative.The Mortgage taken out is also a joint mortgage which your sponsor is included in. This means you are both jointly liable for the mortgage.

To be eligible for the Post office First Start Mortgage you will need to:

  • Earn at last £20,000
  • Have a 5% deposit
  • Property price must not be over £500,000
  • You cannot own any property at the time of completion.

What is the Post Office Family Link Mortgage?

The post office family link Mortgage is essentially a way for your family to fund your mortgage deposit by using the value of their home.The post office family mortgage is geared towards borrowers who have parents who own their properties outright and borrowers who can afford to make their monthly repayments on a mortgage but are struggling to save a mortgage deposit.

The Post office family mortgage works by giveing you a 100% mortgage. 90% on the property you want to buy and 10% of your parent or family members property. The mortgage on your family members property is interest free and must be repaid within 5 years. During the first 5 years you will make repayments on both mortgages. You will then continue to pay off the mortgage on your property.

To be eligible for the Post Office Family Link Mortgage;

  • You must be a first time buyer
  • You must have accessible income of at least £20,000
  • The maximum property price is £500,000
  • You and your family members property must be in the UK.

Both homes can be repossessed if you fail to keep up your monthly mortgage repayments and you should seek independent financial advice.

What are flexible Mortgages?

A flexible mortgage is a type of mortgage that could allow you to make overpayments, underpayments and take payment holidays without any additional cost to you.
Flexible mortgages are especially good as they allow you to overpay on your mortgage and save on interest rate payments.

Most flexible mortgages will include:

  • Allow you to make Overpayments
  • Allow you to make Underpayments
  • Allow you to take Payment Holidays
  • Provide a reserve account from which you can access overpayments you have made
  • Ability to offset savings and reduce the amount of mortgage debt you pay interest on

Advantages of Flexible mortgages

  • Flexible mortgages give you the option to overpay or underpay which can drastically reduce the cost of your mortgage.

  • Flexible mortgages allow you to manage your financial life especially in times when your financial situation becomes worse. You can take payment holidays at no cost to you

Disadvantages of flexible mortgages

  • Flexible mortgages will usually have higher interest rates than typical mortgages due to their flexibility.

What are discount rate mortgages?

Discount mortgages are a type of variable rate mortgage(Mortgages that can move up or down in interest rate, usually track the Bank of England base rate). They work by being discounted to a certain margin below a lenders standard variable rate mortgage. E.g 1% below the lenders standard variable rate.

Advantages of discount rate mortgages

  • If interest rates fall and your mortgage lender decides to reduce its standard variable rate, the interest rate on your mortgage will fall as well.

  • Discount rate mortgages usually have low arrangement fees

  • The interest in your mortgage will always be below the mortgage lenders standard variable rate till your discount mortgage term ceases.

Disadvantages of discount rate mortgages

  • If interest rates fall your rates might not even move as unlike tracker rates the standard variable rate of a lender moves only at the mortgage lenders discretion.

  • If your discount mortgage term is only an introductory offer which lasts between 1-5 years. Once this is over you will then move on to the lenders standard variable rate which is much more expensive.This means your monthly mortgage payments will rise.You need to be comfortable that you will be able to cope with the rise in your monthly mortgage payments.

  • Discount mortgages will usually have high early repayment charges which means you will not be able to remortgage without high costs.If you manage to get a lifetime discount mortgage which means the discount will continue till the end of the mortgage term. In this case the early repayment charge will be reduced after an initial term based on your mortgage lender.

Discount mortgages are not always the best deal., A suitable fixed mortgage might represent better value. You should consult the services of a suitable digital mortgage broker.

What are low deposit mortgages?

Low deposit mortgages are just as they sound, mortgages with the minimum possible deposit. These can be 95% mortgages or even mortgages with government schemes such as the help to buy equity loan where the borrower is essentially putting down just 5% while the government loans them an additional 20% outside London and 40% in London.

Low deposit mortgages could also be in the form of a mortgage lender simply requesting a very low deposit such as 5%. Usually these will only be offered to borrowers with good credit whom have passed the lenders affordability requirements easily.

The benefits of Low deposit mortgages

  • Low deposit mortgages allow first time buyers to get on the property ladder without too much financial commitment. This means first-time buyers can save for a smaller deposit and get on the property ladder quicker.

  • With rising house prices and stable interest rates it presents a great option for a lot of first-time buyers who typically would have had to save an extra 10-15%.

The drawbacks of Low deposit Mortgages

  • If interest rates rose, borrowers will be exposed as those whom are not on fixed rate mortgages will see their monthly mortgage repayments rise and could see first-time buyers miss payments and risk their homes being repossessed. At best, they could see a negative record marked on their credit file which will not help when it's time to remortgage their current mortgage deals.

  • Low deposit mortgages have a high risk of negative equity. Negative equity is when the debt on a property is more than the property is valued. This means that the borrower owes more on their mortgage than the property is worth. This makes it incredibly hard for borrowers to remortgage their current mortgages and in some cases discourage borrowers from paying back their mortgage.

  • Low deposit mortgages also tend to be very expensive as they come with high arrangement fees. They are also notorious for having high interest rates which make the risk of negative equity even greater.

Although low deposit mortgages do offer a path on to the property ladder, It should be approached with great care, almost like an investment. Because in truth, it is one. A very risk one. Seek the services of a professional digital mortgage broker.

What is a 100% mortgage?

A 100% mortgage is one where you put no money down as a deposit and the lender gives you the whole property price as a mortgage. These used to be very common before the financial crisis but they are very rare now.

100% mortgages are very similar to guarantor mortgages as they lender will usually request some collateral upfront.Your guarantor will need to put their house down as collateral or a huge amount of savings in a bank account controlled by them.

Advantages of 100% mortgages

  • 100% mortgages give an avenue for first time buyers to get on the property ladder

Disadvantages of 100% mortgages

  • These mortgages are very risky

  • If property prices fall you will end up owing more than your property is worth( negative equity)

  • The interest rates on 100% mortgages are known to be very high

  • There are very few of these products and hence it will be harder to compare against other products

  • These mortgages are usually expensive to arrange. The lender will also request a Mortgage indemnity guarantee which protects the lender in a case you default. This will be at a cost to you.

Although low deposit mortgages appear cheap, the consequences might end up being way too much. Request the services of a good digital mortgage broker.You should also consider Government mortgage schemes such as the help to buy equity loan and the shared ownership scheme.

What is a 95% Mortgage?

Just as it sounds, with a 95% mortgage you only get a 95% mortgage and have to put down a 5% deposit. This means you will have a 95% LTV(Loan To Value). As with the 100% mortgages this mortgage product was very popular before the financial crisis but has decreased in demand.

First time buyers who meet the mortgage lenders affordability criteria for a 95% mortgage will be able to take one out.

To qualify for this mortgage you will need a good credit record and if not it might be worth taking steps to increase your credit file.

You will also need a good amount of regular income for lenders to consider you for this mortgage.Mortgage lenders will typically loan 4.5 times your income.

Advantages of the 95% mortgage

  • The advantages of the 95% mortgage is that the deposit requirement is low.

Disadvantages of the 95% mortgage

  • With a 95% mortgage you will barely own any equity in your property and if prices fall any more you will find yourself owing more on the mortgage than the property is worth.This will make it almost impossible for you to remortgage to any cheaper mortgages.

  • If interest rates rise you will also have higher monthly repayments if you are not on a fixed mortgage. This might also put the mortgage owed on the property higher than the property value.

  • 95% Mortgages come with high arrangement fees and usually have high early repayment charges.

What are bad credit Mortgage?

If your credit score is low, Most lenders will not offer you a loan. Your credit score could be low because of missed repayments in the past, no credit history or filing bankruptcy. This makes you appear less creditworthy amongst lenders as you seem less likely to repay the mortgage.

Bad credit mortgages don’t exist. In fact the mortgage affordability assessment of a bad credit mortgage is the same as any. They are only termed as bad credit mortgages due to the fact that the applicants will most likely fail credit checks with most mortgage lenders.

The terms bad, adverse mortgages or subprime mortgages allow first-time buyers with little or no credit history to get on the property ladder.Bad credit mortgages usually have high interest rates but after a few years of paying their mortgage in time a first-time buyer will be able to remortgage to a better deal as their credit score will have likely increased in this time.

So can you get a mortgage with bad credit?

Due to the risk of bad credit borrowers the interest rates are incredibly high and the mortgage lender will usually request a larger mortgage deposit.The borrower will not qualify for any first-time buyer mortgage schemes such as help to buy equity loan or the shared ownership mortgage scheme if they have been declared bankrupt within 6 years.

To qualify for the schemes above You will need a large deposit- 15% minimum and your credit file will need to be okay with no defaults or bankruptcy.

What are Cashback Mortgages?

A cashback mortgage is a mortgage whereby the mortgage lender gives you a cashback upon successful completion of the mortgage. This offers are of course usually offered with mortgages which most borrowers are not interested in and for good reason. Cashback mortgages might have unfavourable terms and it is worth using a digital mortgage broker to fully understand.

The mortgage lender will let you know how much in cash back you will receive and what will trigger the cashback.In some cases the lender will request you make your first mortgage repayment before they begin the cashback or usually the cashback will be paid immediately the mortgage has completed.

In some cases your bank will offer you a cashback mortgage where the cashback is done every time you make a monthly mortgage repayment.

Are there any real benefit of cashback mortgages?

  • Yes, cashback mortgages can offer enough sum to recover the mortgage fees which you have paid initially. In some cases the lender will offer to pay your council tax for a set period of time or your stamp duty.

Disadvantages of cashback mortgages?

  • The interest rates on this products will of course be incredibly high and could end up costing you a lot of money than a similar mortgage product even with the cashback.

  • Cashback mortgages will also have high costs such as early repayment costs or long lock in periods where you are stuck with an unfavourable rate for a long period of time. Cashback mortgages will also discourage overpayments by levying high charges of up to 5% on overpayments.

Cashback mortgages might seem like a good deal at first but you must always work out the full cost and compare it with similar products.

New Build Mortgages

Applying for a new build mortgage?

Getting a new build Mortgage can be tricky especially for flats. Problems can arise with completion time for the new build and this can spiral costs. New builds are especially awkward due to the demands of the property developers. E.g Developers can place strict deadlines on exchange of contracts which restrict lenders from carrying out proper due diligence and eventually leads to the mortgage collapsing.Some lenders expect the exchange of contracts to be concluded within 28 days!

Timing is also a key issue when applying for a new build mortgage. As most new builds aren't completed and you will have to get your new build mortgage early to avoid any delays. The risk then becomes that your mortgage offer(usually valid for 6 months:some lenders will give extensions) will expire before the property is completed or a drastic change in the property e.g A price rise or buulding structure could mean the lender withdraws its offer.This could then leave you with a situation where you have entered into an agreement to purchase with no means to do so.

Apart from these factors, applying for a new build mortgage is very similar to applying for a mortgage but here are some more key differences(some lenders impose) to consider.

Key facts for New Build mortgages

Maximum LTV: some lenders will only lend up to 75% of the property price. Speak to a qualified digital mortgage broker for specific advice on this.

Developer cashback offers: Some developers will offer cachbacks to reduce the cost on the buyer. Lenders will consider these cashbacks up to a certain amount and make necessary adjustments on how much they loan.

New build mortgage deposit: New build mortgage deposits usually range between 15-25% which means most first-time buyers will have to put a lot down before they can even consider a mortgage. The good news is Government backed mortgage schemes such as the Help to buy equity loan can reduce the amount of deposit a first time buyer will need upfront to 5%. Always seek advice from a digital mortgage broker to see how this scheme might affect you further down the line.

New home build Guarantee: New home build mortgage lenders will expect to see a 10 year NHBC or Zurich certificate guarantee before they lend. Different lenders might have a more lenient or severe requirement. Your digital mortgage broker will know of these and advise you accordingly.

Future resale value: All lenders are concerned about future resale value. This is for your sake and for theirs, in case they have to repossess your home and sell it to recoup what you owe them. For this reason lenders will have different criterias on what sort of buildings they will not lend on. E.g buildings in commercial areas

Reservation fee: Some developers might ask for hundreds if not thousands of pounds in reservation fee to hold the building for you. If you fail to close on the building you may lose your reservation fee.

Shared ownership New builds: Shared ownership is not available on all new builds so do get in touch with your local authority who will provide more guidance.

What is a staircasing mortgage?

Staircasing is the process of increasing the amount of ownership you have in a shared ownership property. You can do this for properties but on resale as well through the shared ownership scheme. You should check with your landlord for any restrictions that might stop you from staircasing as you please. You might require the services of a solicitor to fully understand the terms of your agreement with your landlord and any restrictions placed on your ability to staircase.

As you buy more into the property you will pay less as your landlord will now own less of the property.
Staircasing will also give you greater ownership which means if you decided to sell the property you will benefit more from any capital appreciation
Full ownership will allow you to benefit from any home improvements and make home improvements without needing to seek approval from your landlord.
100% ownership will allow you to sell your property to anyone without them needing to meet the shared ownership criteria.

How does a staircasing mortgage work?

Staircasing works by allowing you to purchase more shares of the property. Shares are sold at a proportional market value at the time of sale. E.g you own 50% of a £1m shared ownership home and you want to increase your shares by another 10%. If the current value of the home is £1m you will be required to pay £100,000 for another 10% shares of the property. This should also proportionately reduce your rent by 10%.

There are a few general guidelines in place for staircasing. This guidelines are subject to change so you should request a copy of any guidelines from your current landlord.

Shares can only be purchased in 4 steps including the first purchase of equity. This means you can only staircase 3 times to reach the maximum 100% shares which give you full ownership of the property.

All costs incurred during the staircasing process are yours to bear. This include legal fees, conveyancing, mortgage fees etc
Your landlord will expect to receive continuous payments as agreed in your terms whilst the staircasing is in progress. If you fail to pay your landlord any arrears such as rent, he could cancel the staircasing process immediately.

Valuations are carried out by a royal institute of chartered surveyor( who provides at least two comparable valuations from similar properties to inform you on how he reached his current valuation) and if you dispute the valuation you can get another one down but at a cost to you. The valuations are usually only valid for 3 months.
You might have other restrictions on your current agreement with your landlord which you must review thoroughly before you begin the staircasing process.
If there is more than one owner or names listed in the agreement aside from the landlord, all parties will have to agree to the staircase.
If you become a 100% owner you can request the freehold of the property to be transferred to you at no cost to you.

A staircasing Mortgage timeline:

  • Contact a specialist solicitor and inform them of your nintentions( preferably the solicitor who worked on your initial acquisition of the property. You should request a quotation and its always best to select a fixed fee quote with a solicitor who has vast experience of shared ownership transactions.

  • Contact a qualified digital mortgage broker to get an agreement in principle on how much a lender will loan to you and at what rate. This will help you avoid any delays further down the road.This should only be done if you are not paying in cash.

  • Request a staircasing application form from your landlord, return the form filled and pay your landlord the valuation fee.

  • Your landlord will instruct a royal institute of chartered surveyors valuation report and will receive two copies of this once the valuation has been carried out

  • Your landlord will send you an official offer letter(including a staircasing authorisation form) with the valuation reports. You have 3 months to get back to your landlord.

  • You and the landlord will instruct your respective solicitors

  • You will now apply for a mortgage offer via your digital mortgage broker. Once an offer is received, you will notify your solicitor

  • Your solicitor and the landlords solicitor will set a closing data and begin work

  • Your landlord will issue the completion statement which highlights, next steps, your future costs, including service charges, rent etc.

  • You will then complete the staircasing transaction and be notified of your new rent etc.

What are the costs included in a staircasing mortgage?

The mortgage fees
Any solicitor fees
Any valuation fees
Stamp duty
Home insurance( In the case of 100% ownership you will be liable for your own home insurance and no longer our landlord)

We hope this staircasing guide was easy to read and insightful.If you still need some more info, get in touch with us and we will be happy to assist you further.

Buy-to-let Mortgages

What is a Buy to-let mortgage?

A buy to let property is one which i s bought for the sole purpose of making an investment return this is done via renting it out to tenants and property appreciation.

You will need a buy to let mortgage for any property you do not plan to live in.
Buy to let mortgages are assessed in a different manner and the deciding factor is more on the home. If the home is likely to make an income surpassing the cost of maintaining the mortgage then a Mortgage will likely be given. Some Lenders now look into the investor's personal accounts and new regulation will place more impetus on this.Lenders will typically want the expected rental income to cover at least 125% of the Monthly Mortgage payments. Lenders usually require a higher deposit for buy to let loans and the best deals are usually obtained with a 40%+ deposit.

Buy to let Mortgage fees?

Interestingly enough buy to let mortgages with the lowest interest rates seem to have the highest upfront fees as a way for the lender to offset the loss in interest earnings.Typical Buy to let mortgage fees could be anywhere between 0.5% and 5% of the Mortgage.

You can spread this payment as part of the mortgage but this may cost you more. It is always better to consider the APRC rather than APR as this gives you a full overview of the cost of the mortgage.

How tenants affect your buy to let Mortgage chances?

The type of tenant you pan to might really affect your buy to let mortgage chances.. For instance, many lenders have restrictions on mortgages for student lets and Houses in Multiple Occupation (HMOs). An HMO building is defined by having three tenants or more, that form more than one household and who share a toilet, bathroom or kitchen facilities.

You will need buy-to-let insurance!

Most lenders will insist you have a landlords buy to let insurance which covers building and contents as well as landlord liability before they will approve your Buy to let Mortgage.

It is essential you carry out a valuation report and insure your property for the right value so you are not underinsured as this will mean losing out in the event of a claim.

Buy-to-let tax implications?

Buy to Let tax implications are subject to change and are not the focus of this guide.

What is a let to buy mortgage?

Let to buy mortgages are mortgages where a borrower rents out their current property and uses the proceeds to qualify for another mortgage.Doing this means a borrower will need to change their current mortgage to a buy to let mortgage and then get a residential mortgage. Borrowers may get a let to buy mortgage for a variety of reasons including;

  • They think their property is a good investment
  • They don't want to miss out on their new house
  • Its a bad market to sell and they don't want to lose money
  • Borrowers struggling to find a new mortgage deposit for their homes may remortgage their current home to extract funds and then use a let to buy mortgage to increase their mortgage affordability

How does a Let to Buy mortgage work?

As described above a Let to buy mortgage allows you to remortgage your current property to extract cash for a mortgage deposit and then rent out the property to cover its costs and the cost of your new mortgage.

Some lenders will allow you to rent out your property on a residential mortgage for a short period of time after which you will need to switch to a buy to let mortgage.Buy to let mortgages usually require a larger deposit(30%+) and are usually more expensive than residential mortgages.Your rent will need to cover your mortgage repayments on the buy to let mortgage.

Where can I get a Let to buy mortgage?

Contact a good digital mortgage broker who will be happy to assist and point you towards the right lender.

**Let to buy vs buy to let: **

They are both similar but don't expect lenders to have similar affordability assessments.The only differentiation is that a buy to let is when you want to simply buy out a property for rental gains while rent to buy is a situation where you have a residential property you which to convert to a buy to let for a short, medium or long term whilst you acquire another residential property.

Conclusions

The let to buy mortgage can provide great value but it is worth thinking about how it changes your tax status and the legal responsibilities of a landlord

Goodluck with your shopping and remember your home may be repossessed if you do not keep up your mortgage repayments!

Joint Mortgages

Joint mortgages ar a great way to get on the property ladder and buy a bigger & better home by pulling the financial resources of two or more people(usually up to 4).

Every co-buyer will have their name on the mortgage and will be jointly responsible for the mortgage.This means the lender can come after all or one of you if any mortgage repayments are missed. The equity can be distributed in line with contribution by having a pre-purchase agreement and declaration of trust in place.

Joint mortgages are a great option as they drastically reduce the time to the property ladder for many and increases your mortgage affordability as a collective.

You should watch out to ensure your co-buyers has a suitable credit score, salary and savings(if they intend to contribute to the mortgage deposit as well).

A plan should also be drafted in the prepurchase agreement and declaration of trust highlighting how this relationship will end and how you will all be able to sell your equity in the property.

Joint mortgages work just like typical mortgages, the costs are the same but the internal structure between the co-buyers is different. There is no change in the application process but the lender will assess each co-buyer individually to get a collective view of the groups mortgage affordability.

So how do Joint mortgages work?

You can decide to be joint tenants or tenants in common when you get a joint mortgage.

Joint tenancy means you both own equal parts of the property and need each others consent to sell or do anything to the property.

Tenancy in common means you have a pre-purchase or & declaration of trust which allows you to own unequal parts of the property and gives you the right to sell your share in the property at your own will.

Joint mortgages will also show on your credit file and the financial association to your co buyer will be indicated. If this person goes on to carry out any fraudulent behaviour or misses payments on other credit obligations this may negatively impact you. This is why you should ensure you have a fairly good idea of who your co-buyer is.

If you are looking for a co-buyer then there are a few things you will like to know ofcourse to decide if they fit you. You can start your co-buyer search on our Homebae network.

Things to Consider when co-buying

So you have decided co-buying is the best way to get on to the property and now it is time for research. Here are a few things you should consider before co-buying.

You should have a trust deed: A trust deed or declaration of trusts allows you to stipulate who owns what part or shares of the home. It also creates a structure for you to stipulate what happens when either party wants to sell their share. e.g your co-buyer might have first option to buy you out.

Dangers of joint tenancy: If you buy as a joint tenant, this means that if one of you dies the remaining shares of the property goes to the surviving co-buyer regardless of if there is a will in place.

What if both joint tenants die? If both joint tenants die at the same time the property will pass on to the younger co-buyers relatives. This is because the law assumes the older co-buyer will die first and the younger co-buyer will have inherited their shares. This is not great for buyers who are older than their co-buyers and hence a big reason why joint tenancy isn't such a great idea.

What if a co-buyer wants to sell? If one of the co-buyers wants to sell they will need permission of the other co-buyer. If they cant get permission then they will need to go to the courts to force the sale.

Should you co-buy as joint tenants or tenants in common? Most co-buyers will go with tenants in common as it allows them to go into a pre-purchase agreement and a declaration of trust highlighting what will happen in different scenarios. Who owns what amount of the home and who is responsible for what. You can also pass your ownership to your relatives via your will in a scenario you die. Joint tenancy does not give you the same freedom and is therefore not a good option. With Joint tenancy, you both own equal shares of the property regardless of any unequal contributions and need each others permissions to sell or do anything to the property.

Do I need a pre-purchase agreement?

A pre-purchase agreement is agreed upon by co-buyers in a joint mortgage.The agreement stipulates what should happen in different scenarios such as buyers wanting to sell their share of the property or recover their mortgage deposit.

Joint mortgages are becoming more popular as a way to get on to the property ladder. Finding a Homebae is great but a pre-purchase agreement just gives you more protection should things go wrong.

We walk you through some real life scenarios where a pre-purchase agreement could be vital and should be in place.

You and some friends are buying a flat together and you are putting down much more of the deposit.You want reasurrances you can get your money back if anything goes wrong.

*Yes, you should have a pre-purchase agreement to make sure you get the money back.
*

You and your boyfriend are buying a house together and your parents have loaned you the money but want the house as security, the lender does not agree to this. Your parents want guarantees that you will pay them their money back do you you need a pre-purchase agreement?

Yes, you need a pre-purchase agreement which sets out how the money will be paid back.

My girlfriend and I are buying a townhouse together. I have much more money than him and will pay the most of the mortgage deposit. We expect to do a lot of work to the house which I am going to finance whilst my partner sets up her company. We expect the property to rise in price and we will then sell it. We are going to take the title jointly. I am going to meet the mortgage payments. Should I have a pre-purchase agreement and is there anything else to consider?

*Yes, a pre-purchase agreement is an absolute must in your circumstances and there should also be a discussion about how the property title is to be held(if equally or not).
*

**I am buying a first house with my friends . We are going to buy the property with deposit money we have built up together. We have been renting for a couple of years already. We earn about the same, contribute equally to a joint account and intend to pay the mortgage to the property equally as we have done with our rent. Is a pre-purchase agreement necessary? **

*A pre-purchase agreement may be less significant in this scenario, but would still be the preferred option so that there is an agreed timescale for sale or transfer of the property if the relationship came to an end.
*

A pre-purchase agreement is always great back up and you should seek independent advice first.

Co-buying is a very good way to get on the property ladder in record time and get a better property by pooling everyone's financial power together.

You should consider these factors when choosing a co-buyer:

  • Their finances- Can they afford to put a deposit down or maintain regular monthly payments.

  • Their job security- Do they have stable income or savings to cover unemployment phases.

  • Their hygiene- Will you want to live with them for years and years to come.

  • What will they contribute and will it be equal for both the deposit and monthly repayments.

  • Their credit score- No point talking about the above if their creditworthiness does not match a lenders.

  • What happens if one of you dies or wants to sell the property? A declaration of trust will help iron this out.

  • What part of the property will be your space and theirs, and which will be communal?

  • What happens if you have unequal deposits?

If one of you contributes more to the deposit - say, 70% while you provide the remaining 30%, you may specify in your Declaration of Trust that when you sell the property the proceeds will be split in the same way (70/30). If you don't agree that in your Trust Deed (Declaration of Trust), the proceeds will be split 50/50 by default irrespective of how much each party contributed initially.

  • What happens if one of you earns much more than the other?

Similarly, if one of you earns more and, consequently, contributes more to repaying the mortgage, paying bills, etc.; you - again - may decide in the Trust Deed that you will be entitled to a greater share of the property. Without the Trust Deed agreement the presumed ownership is 50% share of the total property (when two parties are involved).

Get the latest posts delivered right to your inbox

The complete list & guide to every type of Mortgage (First-time buyers)(2018)
Share this

Subscribe to Huuti