How do you intend to pay the loan back?
There are 3 options:
Repayment Mortgage (sometimes called Capital & Interest) where each month you pay back both the money borrowed and interest. You can have anything from a 5 to 40 year term to suit your monthly budget, with the peace of mind that as long as you make all your payments on time, at the end of the term your debt is repaid in full and you own the property outright.
Interest Only. This method requires to you purely service the interest on the loan but you are responsible to pay the loan back at a later date. The FCA is happy with this on the basis that you have a viable, clearly defined Repayment Strategy. Most commonly you would use other assets such as property, shares, pensions, ISA’s etc. Some lenders do allow future bonuses or downsizing at a later date. Your method of repaying the loan will have a big impact on the lender recommended as all lenders have different, and sometimes complex, rules around this. Deposits of 25% or more are often required, but not in all circumstances.
Part and Part. You can mix the two above to fit your needs.
What type of product would you like?
There are 2 main options:
Fixed Rate. Does what is says on the tin. You can fix your monthly repayments for typically 2, 3, 5 or 10 years. Most lenders will allow you to repay an extra 10% of the loan even within the fixed rate period. These products can be more expensive but they give you peace of mind and protect you against future interest rate rises.
Variable Rate. These are typically linked to either the Bank of England Base Rate or the lenders own ‘Standard Variable Rate (SVR)’. They tend to be cheaper than fixed rates, and often over a shorter period of 2 years. While they can be cheaper, you are not protected against any rise in interest rates in the future.
You can also build in extra features
such as:
Offset. Aside from the two main options on product above, some lenders will allow you to have a linked savings account. Where you have a positive savings balance, these funds are ‘offset’ against the mortgage and no interest is charged against that element of the mortgage. In a simple example, if you have a mortgage of £500,000 and savings of £100,000 you are only charged interest on £400,000 of the loan. This can be very effective if you are self-employed or have lumpy income. There are also tax benefits as no interest is paid on your savings, no tax is deducted. Very beneficial for the right type of people. As there is a premium charged for this product, you often need 10% of the mortgage balance, or more, to make this cost effective.
Penalty Free/Large Overpayments. As mentioned above, most lenders allow you to repay 10% of the mortgage each year at no charge. Sometimes you would like to, or can pay more than this. As per offsets, this option is more expensive, however, if you feel this is likely it can mean you save more interest over the life of the loan. Typically a 0.5% – 1% premium is charged over the comparable ‘standard’ product.
The most relevant product and additional features will be dependent on your personal circumstances and views on interest rates. Again, this really emphasises the need for professional advice.
