Residential Mortgages

The term residential mortgage relates to a mortgage used to pay for, and usually secured on, the house that you live in. Residential mortgages are the lowest risk mortgage for lenders and therefore tend to have slightly lower interest rates than buy to let or commercial mortgages. The level of risk for the lender increases depending on the amount of the loan compared to the value of the property (known as loan to value) and therefore you would expect a lower rate, for example, for a 60% loan to value mortgage compared to a 95% loan to value mortgage. Mortgages can have variable or fixed rates of interest. Variable rates will tend to track a ‘base’ rate meaning that your payments can change if the base rate goes up or down. Although there is a chance that you can pay less using a variable mortgage, most people prefer the certainty of a set monthly payment so will opt for a fixed rate.

A fixed rate means the same amount will be taken each month for the fixed period, mostly commonly this is between 2 and 5 years but some lenders may offer fixed periods for as many as 10 years.

At the end of a fixed rate period your mortgage will revert to the variable rate. Most people use this opportunity to review their lender and usually lock in for a further fixed period. Longer fixed rate periods will be attractive if you expect interest rates to rise while shorter fixed rate periods will be attractive if you are expecting them to fall.

For a residential mortgage, the lender will assess your ability to take the mortgage based on your credit history and affordability of the mortgage. Affordability tends to initially be based on the value of the loan as a multiple of your gross salary but will then usually be checked to ensure that you will be able to meet the monthly payment from your net pay each month once all your other bills have been paid.

You can take either a repayment mortgage, where your monthly payments cover the interest and repay a small amount of the loan, or an interest only mortgage where the monthly payments simply cover the interest. For interest only mortgages, the lender will require that you have some other means of repaying the loan at the end of the term because they assume that you will wish to continue to live in the property.

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The Guide to Risk Resilience During COVID-19

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