Mortgage guide: what are the different types of mortgages, and how do I get a mortgage on a renovation project?

Celebrity mortgage expert Tayo Oguntonade answers all your mortgage FAQs, from mortgage types to getting a mortgage for a property abroad

Tayo Oguntonade, Mortgage Expert
Published: March 15, 2022 at 3:53 pm
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Getting the right mortgage can be a tricky process, especially when there are so many different factors to consider.

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Not only are there a number of different mortgages to choose between, but to make matters more difficult, different rules apply for mortgaging renovation projects, self-builds, auction properties and properties located abroad.

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Luckily, YourHomeStyle have qualified Mortgage Advisor and BrickzwithTipz founder Tayo Oguntonade on hand, to break down all the basics for us!

We caught up with Tayo to find out all about the different types of mortgages on offer, plus some of the lesser known facts about getting a mortgage.

Keep reading to discover everything you need to know about the different types of mortgages available, mortgaging a self-build property and more...

What are the different types of mortgages I can get?

There are many different mortgages available, which is important as we all have different borrowing requirements. What works well for one person may not work so well for the next, so it's important to understand how each one works.

Fixed rate mortgages

This is one of the most popular mortgages and involves a deal where your interest rate is fixed for a 2, 3, 5 or 10 year period typically. For most people, their mortgage will be their single largest bill and fixed rate mortgages offer some consistency as they know what their payments will be for the foreseeable future. This allows the homeowner to budget accordingly.

Tracker mortgages

Tracker mortgages track the Bank of England’s base rate, which typically involves adding a percentage on top. For example, the base rate is currently 0.5% and a lender may choose to charge 2% more than the base rate giving an interest rate of 2.5%. It’s important to note that as a result your interest rate can change whenever the Bank of England’s base rate changes.

These are the two main types of mortgage, but there are also variable rate, capped, discount, guarantor, bad credit mortgages to serve different individual needs. Always seek mortgage advice when making a decision on which is best for you!

How do I get a mortgage on a renovation project, self-build or auction property?

There are numerous lenders that will offer some form of refurbishment finance that covers the cost of both the property and the renovation required. The type of lender you go for will depend on the house itself and whether or not you plan to occupy it. If the house is in a good state of repair and is deemed ‘habitable’ you may even find some high street lenders are comfortable offering refurbishment finance.

However, if the property is uninhabitable and/or you are refurbishing it to sell it onwards, you may find that it does not meet the lending criteria for high street lenders. This is because the risk is increased for uninhabitable properties and high street lenders have products typically designed for long-term lending and not the time frame your typical refurbishment takes.

Hope isn’t lost though, because there is specialist finance available in the form of bridging loans. Bridging loans are a form of finance that is commonly used for refurbishment properties and properties bought at auction. It is a form of short-term lending that is known for having less strict criteria than your traditional mortgage, and a much quicker underwriting process, perfect for developers.

Self-build mortgages are also a form of specialist finance that can help to assist building a home from scratch. Self-build mortgages normally release funding in stages following or before key phases in the build. Different lenders will have different key phases but some of these will include land, substructure, first fix, second fix and completion.

A good way to find out what lending is best for you is to sit down with a mortgage broker that has experience in refurbishment or self-build finance. Some of these brokers will charge a fee, but the fee is a lot less than what you will pay if you take a swing without any knowledge or guidance!

Is an interest-free mortgage or repayment mortgage better?

When buying a home to live in you will find that it’s getting a lot harder to get lenders to agree to lend on an interest-only basis. This is because mortgage lenders have now been required to have robust and responsible lending rules. In order to get lending on an interest-only basis you will need to make the lender comfortable that you can repay the loan in full when the term ends. This may be evidence of cash in the bank, substantial savings or evidence of a high annual income.

Most lenders will feel a lot more comfortable and are more likely to lend to homeowners buying with a repayment mortgage. In this case, they just need to ensure that the homeowner can afford the monthly payments for the term of the mortgage as on that final payment the house will be repaid in full.

It’s worth noting that mortgage lenders are happier with lending on an interest-only basis for buy-to-let properties - this is because the owner can just sell the property to repay the loan after 25 years.

How do I go about getting a mortgage for properties abroad?

With more and more of us opting for a life in the sun, it's no wonder that overseas mortgages are becoming more popular. This is a type of specialist finance and you will find it falls outside the risk appetite of some high street lenders but it is still possible to obtain.

You will need to speak to a mortgage broker who has experience in overseas mortgages and access to products. Some of the lenders will be UK-based and some are international mortgage lenders. The number of mortgages available to you will vary depending on the country that you are looking to purchase your property in.

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It’s worth noting that one of the most common ways of buying properties abroad is to utilise the equity in your existing home and remortgage your house to finance your home in the sun.

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