The UK mortgage market has found itself in an interesting position in recent times. Despite prospective buyers and homeowners having more choice than ever when it comes to sourcing the right deal, a number of external factors have contributed to a challenging market state that has resulted in increased mortgage rates and general uncertainty felt by the public as they hedge their bets on whether they think rates will go down or up. This brings us onto the main talking point of this article, which is to identify some of the major mortgage types favoured by the UK public in the current buyer climate. It will also determine which of your customers might be the most suitable for some of the more niche types so that you can have more engaging conversations going forward where the needs of individual customers are met. Most of the major mortgage types will be covered here, as well as a few that you may be less familiar with or at least won’t have arranged quite as often as others.
Buy-To-Let Mortgages Explained
What is a Buy-to-Let Mortgage?
As a mortgage broker, you are probably already more than aware of what a buy-to-let mortgage is, especially since it is one of the most popular mortgage types requested for arrangement. Buy-to-let mortgages are typically arranged on behalf of those looking to purchase a property and then rent it out to tenants, with the original buyer then acting as the landlord.
How Do Buy-to-Let Mortgages Work?
The manner in which buy-to-let mortgages work makes them intrinsically different to residential mortgages. Arranging a buy-to-let mortgage typically involves contending with higher premiums and interest rates, in addition to your customers requiring a larger deposit for the property than they typically would for a residential property. Your role as a broker will be to ensure your customer is able to cover the mortgage premiums with the rental income from the property.
Who Should You Recommend a Buy-to-Let Mortgage to?
The type of customer you should recommend this type of mortgage to represents a very interesting proposition for an adviser. There area few scenarios where a buy-to-let might be suitable with just some of the following included in that list:
- An existing homeowner looking for a new income stream (first-time buyers can also qualify but lenders will view them as high-risk as they are yet to own a property themselves).
- Customers who have inherited a property but have no desire to live there. If they are still interested in keeping the property a buy-to-let mortgage represents a great opportunity.
- Customers who have surpassed a salary of £25,000 and have accrued a good credit rating, without racking up significant debt.
Fixed-Rate Mortgages Explained
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a very useful and very reliable mortgage type which is favoured by the average buyer. This is because this type of mortgage allows a buyer to essentially ignore the ever-fluctuating state of mortgage rates while their repayments remain the same throughout the duration of their deal. The obvious upside to this is that if mortgage rates suddenly skyrocket, or just generally start to increase, the buyers’ repayments aren’t impacted so they are always certain they will be paying the same each month.
How Does a Fixed-Rate Mortgage Work?
Requests to arrange a fixed-rate mortgage will probably increase steadily over the coming years due to the base rate’s current volatile state which is driving certain customers to opt for the stability of this mortgage type. The wide range of terms available will also grant a great deal of flexibility for buyers which advisers should illustrate so as to ultimately arrange a policy that best suits their customers.
Who Should You Recommend a Fixed-Rate Mortgage To?
After opening discussions with your customers regarding their desire to secure mortgage it should be easy to determine what their needs are from there with further communication. Those looking for stability and consistency in their monthly repayments so that they can budget more precisely will surely opt for this type of mortgage as a fixed-rate guarantees your payment amount will remain the same regardless of what happens with interest rates. If your customer is hesitant, wanting some sort of balance between stability and flexibility, then it’s definitely worth making them aware of the different fixed-rate mortgage lengths they have available to them.
Variable-Rate Mortgage Explained
What is a Variable-Rate Mortgage?
In contrast to a fixed-rate, a variable-rate mortgage is one that sees a policyholders’ monthly repayments vary depending on interest rates at the time. There are three categories of variable rate mortgages:
- Standard variable rates – following the conclusion of your customer’s mortgage, advisers can recommend a standard variable rate mortgage (or an SVR) which retains all the same attributes as a variable rate mortgage.
- Tracker rates – tracker rate mortgages, as the name would suggest, alter the amount a customer must repay based on the changes of interest rate. This is typically the Bank of England base rate in the UK, plus a set percentage.
- Discount rates – a discount variable mortgage tracks a lender’s SVR mortgage but at a set amount below the agreed amount.
How Does a Variable-Rate Mortgage Work?
The defining characteristic of a variable-rate mortgage is of course the fact that the mortgage repayments will both increase and decrease over time in response to interest rates. Customers who choose to arrange this type of mortgage will struggle to budget with complete accuracy as they will be unable to predict what their payment that month will be with 100% confidence.
Who Should You Recommend a Variable-Rate Mortgage To?
While a fixed-rate mortgage should be recommended to customers who want complete certainty in knowing how much they will be paying month on month. Customers who are happy to relinquish this predictability and instead incur the added costs of higher repayments on occasion in the hope that they will also benefit from lower monthly payments when interest rates decrease, should therefore be recommended some sort of variable-rate mortgage.
Arranging a Mortgage for your Client
There’s a lot that goes into arranging a mortgage for a client, but hopefully with this additional knowledge in what the different types of mortgage are and what type of customer might be most receptive to each type, you can add more value to your client conversations. You can view the full list of mortgage partners we work with at PRIMIS and download our lender panel PDF by clicking here. With great partners to choose from such as Halifax, HSBC, Nationwide, NatWest and much more, our advisers always have plenty of freedom when it comes to how they conduct their business and arrange policies for their customers.
For any advisers reading through and thinking that they want to brush up on some additional basics then we recommend having a browse of some other articles within our ‘Back to Basics’ campaign which analyses topics such as ‘What is income protection?‘ and ‘Why join a mortgage network?‘
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