What are the types of mortgages, and how does it benefit you?
Choosing the right type of mortgage is highly crucial so you do not suffer from making repayments in the coming years. Each type of mortgage works differently; they have their own pros and cons. You must know them and how they work so, you can make the right decision.
If you are a first-time borrower, different types of mortgages will likely disconcert you. It may be tough to come on one side of the fence or the other. Online research is imperative to know about how the mortgage works.
You will get
an inordinate amount of information online; however, you may still hang back,
but you can seek help from an online
mortgage broker in the UK. They can suggest you the correct type of
mortgage based on your financial goals and purposes. There are various types of
mortgages, and they are all listed below with their benefits and risks. This
detailed guide can prevent you from dithering.
First-time buyer mortgages
As the name suggests, these mortgages have been designed to help people who want to buy their first homes. First-time buyer mortgages, in other words, are also called 95% mortgages. It means the loan-to-value mortgage will be 95%, and you will have to submit 5% as the deposit upright.
This is the minimum deposit amount, but a few lenders require you to arrange at least a 10% deposit upfront. However, if you have a bad credit score, a lender may ask you to put more money as a down payment, up to 20%, and the interest rate will likely be higher.
As the mortgage term may be between 20 and 30 years, it may mean taking on too much debt, and it can be scary. Therefore, it is suggested to arrange a guarantor with a good credit score who can be your family members, friends, or colleagues.
This will
lower the interest rate. Like other mortgages, first-time buyer mortgages are
also available at the fixed interest rate and variable interest rates. You will
be able to pay down your mortgage at a fixed interest rate for two to five
years, and then you will automatically be put on a standard variable interest
rate, which keeps fluctuating as the base rate changes. Look at the benefits
and drawbacks of first-time buyer mortgages:
- You can borrow up to 95% of the value of your home.
- You can qualify for these mortgages even if you have a bad credit score.
- You may not be able to borrow a large amount of money.
- The interest rate will likely be higher in case your credit history is poor.
Remortgages
Remortgage means applying for a new mortgage at a different interest rate, either from an existing lender or a new lender. The purpose of remortgaging is to avail of attractive interest rates, which generally come into action when the period of the fixed interest rate deal is about to expire.
Remortgage mainly helps borrowers who borrowed money with bad credit ratings. Since you had paid down the debt for at least two years, your credit score may have improved, a favorable situation to avail yourself of lower interest rates.
A lender will
review your credit score and repaying capacity again. It is intrinsic to have a
good credit score when you apply for it. Here are the benefits and risks of
remortgages:
- It whittles down your monthly mortgage payments.
- You can borrow more money.
- The cost of remortgaging will be higher if you apply for it with a new lender.
- It may put an additional burden on your finances if you borrow more money.
Buy-to-let mortgages
Buy-to-let mortgages are absolutely different from residential mortgages. These mortgages allow you to borrow money to buy property to rent out rather than living in. The borrowing amount is estimated based on the expected rental income.
However, a few lenders may consider your other income sources as well. Buy-to-let mortgages have been designed to help if you want to make money from property. You can either earn money through rent or at the time of selling the property when you release capital gain.
You must have a good credit score to apply for a buy-to-let mortgage, and you will have to arrange a deposit of up to 25%. A couple of mortgage lenders can allow you to apply for these mortgages with a 20% deposit. There are two types of such mortgages.
Interest-only mortgages require only interest payments each month. It means you will settle the principal when you sell the property. Another form is repayment buy-to-let mortgage, which requires a complete settlement of the debt by the end of the term.
It means you can either rent out the property and keep the entire income with you, or you can sell the property and keep the full sale amount. Consider the advantages and disadvantages of buy-to-let mortgages:
- These mortgages are more expensive than residential mortgages despite a good credit rating.
- Interest-only mortgage option will allow you to manage monthly payments easily.
- You will see significant growth in the market value of your property.
- The repayment mortgage option can be quite expensive as it may not be possible to earn that amount of rent.
- It will cost you much more when the property is vacant.
Commercial mortgages
A mortgage that you take out against a property that you do not use for a residential purpose is known as a commercial mortgage. Buy-to-let mortgages are also a part of commercial mortgage but they involve property of very high value.
Commercial
mortgages are used when you cannot have access to business loans. You can use
them either to buy a commercial property or to buy a business. These mortgages
may last for 25 years and the lending amount could be worth up to 75% of the
value, which can further go down if you are using funds to buy a business. Look
at the following pros and cons of commercial mortgages:
- They carry a lower interest rate than business loans.
- You can save money on tax as interest payments are tax-deductible.
- You can generate income by renting out.
- You cannot avail of a fixed interest rate deal for these mortgages.
- Commercial mortgages may be more expensive than residential ones.
The final word
No mortgage can be interchanged with the other. Each of them has a specific purpose and is associated with certain benefits and risks. You should try to mull over them before making a decision.
You cannot altogether avert the risk, but you can mitigate them. For instance, you can get a residential mortgage at a lower interest rate by having a good credit report and stumping up a bigger deposit size. If you know how a particular mortgage works, you can make a better decision.
If you are still confused about it, you can consult an independent mortgage advisor in Glasgow. Based on your goals, credit score, deposit size, and repaying capacity, they will advise you. Do proper research so you choose the best and most reputed mortgage broker. They should have an extensive network of mortgage lenders whom they can introduce you based on your financial situation and needs.
Description: There are several types of mortgages like first-time buyer mortgages, commercial mortgages, remortgages, and buy-to-let mortgages.