Mortgage Types Jargon Busting

What is a flexible mortgage and how do they work?

I touched on this with the offset – there is no solid definition of a flexible mortgage. It’s not a specific product.  To some banks, a flexible mortgage can simply mean the ability to overpay the loan.  Most banks will let you pay off 10% of the mortgage balance each year without any penalties. But typically if you want to pay off more than that it might be deemed a flexible loan, especially if you can make unlimited overpayments. 

Some lenders give you things like payment holidays. Let’s say, for example, my mortgage payments are £1,000 a month and I’ve overpaid by £3,000 this year. I could then underpay by £3,000 the next year. You effectively have to build up the credit. 

Then you get things like cashback and porting. But porting really is a standard feature on every loan. To call that flexible is a touch misleading.  There’s no one definition, so we will always speak to a client about what they really need. Do you want the ability to offset because you’ve got lots of cash? Again this is great for self-employed people. If you’ve got a tax bill coming up, you can pop that in the offset account and get really good use of that money before you pay your tax. 

If you have a high bonus, do you want something that’s penalty free to pay off the loan really quickly? The faster you pay it off, the less interest you pay.  Then we’ll find the best lender we can. There’s no point going to a very expensive flexible mortgage if you’re not going to use half the functions. We’ll keep your costs down and get that mortgage paid off as quickly as possible.

What is a Joint Borrower Sole Proprietor Mortgage?

This is sort of a rebadged guarantor loan. It used to be typically for parents helping children onto the market. But we’re now seeing children helping parents stay in their home. The principle is fairly simple – it’s a joint mortgage with two or more people named on it. But only one of them is on the property deeds. 

It’s really effective because if you’re helping a child or helping your parents, there are no tax implications for you. You simply have to afford the loan jointly together – so it makes affordability easier and gets around stamp duty issues as well. Quite a few of the main banks offer this now as an option. 

With house prices continually going up, it’s a great way of helping people onto the ladder or helping people stay in their homes for longer.

What is Shared Ownership?

Shared ownership has been around for a long time now. It’s typically in partnership with a housing association. What you do is buy a chunk of a property – typically 25% plus – then you rent the remainder. I might buy 25% of a property valued at £100,000. I’d need a 5% deposit which is a couple of thousand pounds.

Then I pay rent on 75% of the property value. If the market rent was £1,000 a month I’d pay £750 rent on my share. Why I like this scheme because we can do something called staircasing. So as my income increases I could take my 25% stake to 40% or 50% until I buy the property outright. Every time you staircase, your rent decreases, so it’s a positive cycle. 

Another good thing is that you can buy a bigger property than you can afford on day one. You don’t have to move, so it keeps your costs down. I’m a big fan of the scheme when it’s used effectively. But you just need to know how to work it all.

What other schemes are there now that Help to Buy has ended?

That’s left a bit of a hole If you’re a developer – it was a very successful scheme. What we’re already seeing, which I think will continue, is developers stepping in and replicating that scheme. 

Let’s say the big builders out there – Barrett, Wimpey, all those sorts of guys – they’ll acquire 40% or 60% percent of the property with you, you mortgage the remainder and then you can buy the chunk out just like Help to Buy. You just work with the developer instead of the government. 

From an investment point of view there are big pension funds that want exposure to property, and this is a great way of doing that. So this could become more of a private thing rather than having government support.

What else should we be aware of with mortgage products and schemes?

There are a couple of things that clients ask me about and a common one is APRC – annual percentage rate calculation. It can be extremely misleading for mortgages and I wouldn’t get overly hung up about it. It caters for two things that you have no control over. 

Let’s say you get a 25 year mortgage and you go for a five-year fix at the beginning of it. That APRC will calculate the first five years at the fixed rate of interest. But it will then calculate the remaining 20 years of interest at the lender’s highest standard variable rate. 

As we already touched on, that variable is likely to change. You’re likely to remortgage, you might repay the loan. So don’t get hung up on an APRC. What we do as a broker is work out the total cost over the initial product period – so how much you will spend over the first five years. Then we review you after that point.

Another bit of jargon that comes up a lot is the start date of a mortgage. When you first get your quote from your broker or a mortgage offer it assumes a start date. It’s not when your first payment will be – they just have to assume a start date. So don’t get hung up on that. 

Everyone always worries about when their first payment is going to come out. It’s typically the first of the month, but there is flexibility around that. If you want a different day just talk to your broker about it. You can rest at ease because the bank will write it to you letting you know when your first payment is and how much. The rule of thumb is if you’re completing in the second half of the month, your first payment will probably be the first of the following month. If you’re completing the first half of the month it’ll probably be the first of the next month.

Finally, just to circle back on products – we can talk about products all day long but it’s boring – If my job was just talking about that I wouldn’t do it for a living. The interesting bit is the relationship between them. If fixed rates are more expensive than variable rates, it means we’re expecting interest rates to rise. If they’re about the same, we expect interest rates to be flat and if fixed rates are cheaper, we’re expecting interest rates to fall.

At the end of 2022 this is really relevant because over the next six, 12 or 18 months all of those scenarios are likely to happen. It’s really interesting. If a fixed rate is 0.5% cheaper than a variable rate, we might expect the base rate to come down by 1%  – so look at the product you’re being offered now. What’s your risk appetite? What horizon are you doing this over? That’s ultimately how you decide what product is best. 

We don’t just pick one, we look at the relationship, the differences, the margins and money market rates. We’re here to make sure that you’re getting the right product for you based on your risk appetite and saving you as much money as possible. 

Your home may be repossessed if you do not keep up with your mortgage repayments.