Securing a mortgage is a significant step in the journey to owning your own home. However with various types of mortgages available in the UK, finding the right one can feel overwhelming. In this guide, we’ll explore the different types of mortgages offered in the UK. We hope it will help you understand their features, benefits, and suitability for your individual needs.
Fixed-rate mortgages
A fixed rate mortgage is one where the interest rate remains the same whilst in the fixed rate period of the mortgage term. This is typically between two and ten years. They offer stability and predictability for borrowers, allowing them to budget confidently. They can be sure in the knowledge that their monthly payments will remain the same for the mortgage’s fixed rate term. The rate, and therefore payments, will not be impacted by a change in Bank of England interest base rate* while in the fixed rate term.
Tracker mortgages
A tracker mortgage has an interest rate that is linked to the Bank of England’s base rate, plus a set percentage. As the base rate goes up or down, so does the interest rate on the mortgage. Tracker mortgages often start with a lower initial rate but can increase if the base rate rises.
Variable rate mortgages
A variable rate mortgage is not directly linked to the Bank of England base rate. However the rate may change loosely in line with it. The rate may change several times over the course of the mortgage deal, at the discretion of the mortgage lender. This can lead to uncertainty for the borrower. It may be an attractive option to them initially, though, as they may be introduced to the deal at a low rate.
Buy-to-Let mortgages
Buy-to-let mortgages are designed for landlords purchasing properties to rent out. These mortgages often require a higher deposit and may have different affordability criteria than residential mortgages. Fees associated with these mortgages can also be higher than standard residential mortgages.
Interest-only mortgages
With interest-only mortgages, borrowers only pay the interest on the loan each month. The original amount borrowed remains unchanged. The benefit of this type of mortgage is that the repayment amount will be lower each month than on a repayment mortgage. However the amounted owed on the property does not reduce. This means if the property is sold at a later time, its equity will be far less than if some capital had been paid off.
Discounted rate mortgages
A discounted rate mortgage offers a set discount percentage on the lender’s Standard Variable Rate (SVR) for a set period. The SVR may change at the lender’s discretion. So, this type of mortgage offers less stability and predictability for borrowers than a fixed mortgage. However the introductory rate may be inviting to those who are able to cope with the unpredictability of monthly payment amounts.
Offset mortgages
Offset mortgages allow borrowers to link their mortgage to their savings or current account if you bank with the lender too. The balance of your linked accounts is offset against the mortgage debt each month. The interest is worked out on this lower amount, reducing the amount of interest charged. Offset mortgages can help borrowers pay off their mortgage faster and save on interest payments. However the interest rate charged is higher than on other mortgages. So a higher rate will be charged on a lower amount.
Navigating the myriad of mortgage options available in the UK can be daunting. Having a good understanding of the features and benefits of each type of mortgage can help you make an informed decision. We are happy to discuss the different options available to you, to meet your individual requirements. Contact us to start the conversation.
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Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.
The information contained within was correct at the time of publication but is subject to change.
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