The UK base rate of interest has been cut to 4.75 per cent, the Bank of England announced last week.
The Bank’s Monetary Policy Committee (MPC) voted to cut the rate for only the second time since the pandemic.
Following 14 consecutive hikes, the base rate of interest was held at 5.25 per cent for a year from August 2023 to August 2024 when it was then cut to five per cent.
Surges in mortgage rates over the past two years have been partly due to the economic turmoil sparked by the ‘mini-Budget’ policies announced in September 2022 by then-Prime Minister Liz Truss and former Chancellor Kwasi Kwarteng.
Londoners have been left footing the bill for £7,500 more a year on average for their mortgage payments.
The recent cut to the base rate of interest will mean mortgage repayments for households could go down, news that will be welcome to homeowners with variable and tracker rate mortgages.
These mortgage rates move in line with the Bank of England’s interest rate and are thought to number around 150,000 in London.
Mortgage holders with fixed rates of interest will not see a change, although the sting will eventually be felt when homeowners — many who bought homes around five years ago, at times of record low interest rates — come off their lender’s fixed rate, and try to remortgage or move home.
Amid the ongoing economic turbulence, it can be hard to know what type of mortgage will suit your needs. Here are five ways you can borrow to buy a home.
Repayment mortgages
Most homeowners have repayment mortgages, and repay some of the capital amount borrowed, as well as some of the interest on the loan each month. Eventually they own their home outright when the loan is paid off. There are two types of repayment mortgage: fixed-term and variable.
With a fixed-rate mortgage, the interest rate is fixed for a set amount of time and won’t be affected by Bank of England base rate rises or fluctuations in the market. Typically, the fixed rate period (also known as the initial rate period) is the first two, three or five years of the term.
As the name suggests, variable rate mortgages have interest rates that can go up and down, meaning monthly payments can change. There are three main types: standard variable rate (SVR), tracker and discount-rate.
First-time buyer mortgages
For many first-time buyers, meeting deposit requirements is the biggest hurdle to realising the dream of home ownership.
This is where a 95 per cent mortgage can help, as with a home loan at 95 per cent loan-to-value (LTV), buyers need to raise a deposit of only five per cent.
The LTV is a ratio of a home loan relative to a property’s value. For example, a mortgage worth £190,000 on a £200,000 home has a 95 per cent LTV. Buyers then make up the five per cent difference with a deposit — in this case, £10,000.
During the uncertainty of the pandemic, banks became much more risk averse and many pulled their 95 per cent mortgage deals. But the product came back on the market after a government initiative was launched in 2021, providing a guarantee to mortgage lenders to encourage them to offer high loan-to-value (LTV) mortgages.
Major lenders including Barclays, HSBC, Lloyds, NatWest, Santander and Virgin Money offer 95 per cent mortgages under the Mortgage Guarantee Scheme. The closing date for the scheme has been extended to the end of June 2025.
Zero-deposit mortgages
Renters who lack savings or financial support from their family can potentially make the jump on to the housing ladder with a new zero-deposit mortgage.
Skipton Building Society’s new “track record” mortgage could give a helping hand to people with a strong history of paying their rent but who have been only able to save a little or nothing for a deposit to buy their first home.
The deal is available for first-time buyers across Britain. Tenants aged 21 and over may be able to take out mortgages at between 95 per cent to 100 per cent of the value of the property they want to buy.
Skipton says it will not allow borrowers to pay more for their mortgage than they were handing over in rent. Applicants will also need to demonstrate at least a 12-month track record of paying their rent on time.
That should take care of concerns about affordability but does not eliminate the risk of negative equity.
Interest-only mortgages
Unlike the above repayment mortgages, interest-only mortgages require solely the interest to be paid for the term of the loan. They offer cheaper payments, but borrowers have to make sure they have a way of paying the full loan back at the end of the mortgage term.
They are not as common as they were before the credit crunch and have been the subject of mis-selling scandals in the past.
Since 2014, it has been more difficult to borrow on an interest-only basis. Not all lenders offer interest-only and those that do will have strict criteria such as a decent deposit and having an approved repayment vehicle in place.
According to UK Finance, new interest-only lending, while still permitted, accounts for only a small minority of activity. Just 32,000 interest-only loans were advanced in 2021 — less than three per cent of total lending.
‘Part and part’ mortgages
There is also a half way option between interest only and a traditional repayment mortgage. Called ‘part and part’ mortgages, these allow you to pay off some of your mortgage over time, but not all of it. When the mortgage term ends, there will still be some money left to pay off.
Experts stress that specific financial advice should be sought to ensure that there is a full understanding of the part and part arrangement, and any later financial considerations have been taken into account.
Lifetime or ‘reverse’ mortgages
Available to homeowners aged 55 and over, a lifetime mortgage, sometimes called a ‘reverse mortgage’, is a loan secured against your home that allows you to release tax-free cash without needing to move out. It’s a type of equity release, freeing up wealth tied up in an asset but allowing you to carry on living in the property.
Unlike conventional mortgages, where interest is charged on an amount that decreases with time, interest on lifetime mortgages is charged on an increasing sum, so your debt can grow quickly.
This is because you don’t usually make any repayments, so the interest on the loan is therefore added to your debt on a continual basis.
You can take the money as a lump sum or as a series of lump sums. No repayments are required until you die or move out of your home into long-term care.
