There are multiple types of mortgage available in the UK. With each one designed to suit different home buying situations, the two main types of mortgage are as follows:
Fixed Rate - The interest on a fixed rate mortgage does not change for a specified amount of time, usually between two and five years.
Variable Rate - The interest on a variable rate mortgage can change depending on a number of factors.
When you take out a fixed rate mortgage, your interest will not change for the length of the deal. Even if national interest rates change, yours will not. Fixed rate mortgages are usually advertised with the amount of time they are fixed for. Typically, buyers who have a fixed rate mortgage renew before the initial term expires to ensure their rate stays affordable. If not, you will automatically be placed on the standard variable rate that your lender offers, which is usually higher.
As you can imagine, fixed rate mortgages offer peace of mind to the borrower, as you can rest assured your monthly payments will stay the same for at least the amount of time your contract specified. They are usually ideal for first time buyers who may struggle to keep up with changing interest rates.
Due to the overwhelming benefit of being fixed rate, this type of mortgage usually comes with a slightly higher interest rate. Additionally, if you sign the contract at a specified rate, and then national interest rates fall, yours will remain the same.
As the name suggests, variable rate mortgages can change their interest rates at any time. This can occur due to a number of factors, the most common being the rate being changed by your lender or by the Bank of England. Variable rate mortgages are usually taken out to gain a cheaper interest rate, which is offset with the risk that this will rise over time. If you take out a variable rate mortgage, ensure you budget accordingly so that you can afford any changes in the size of your payments.
Variable rate mortgages generally start out at a cheaper rate, which is ideal for homebuyers wanting as low a rate as possible. In the case of a standard variable rate mortgage, you are able to leave or overpay your mortgage or time. This is a higher level of freedom that you would find with a fixed rate mortgage. Additionally, if the lender cuts their standard variable rate, you will see your rate drop too.
When you take out a variable rate mortgage, it can be hard to budget in advance due to the risk of your mortgage payments changing. At any point during the duration of the mortgage, the rate can change. The lender is free to raise their rate at any time, and in the case of national finances, as is the Bank of England.
Standard variable rate mortgages (SVR) come with the standard rate on interest that your lender charges homebuyers. This will last as long as your entire mortgage, or until you change your arrangement.
Sometimes, your lender will give you a discount off their standard variable rate. This is usually used as an incentive to get people to take out a mortgage with them, and typically lasts for the first few years of the mortgage. However, just because one lender offers a discount, other lenders may still be cheaper without a discount.
With a capped rate mortgage, you will pay the standard variable rate, and this will change in accordance with your lender. However, the crucial difference is that your rate is capped, and will not rise above a certain level. This gives a mild level of reliability; as long as you can afford the maximum capped rate, you will be able to budget easily.
Tracker mortgages change their interest more or less in unison with another interest rate. This is typically the base rate specified by the Bank of England, with a few percentage points added on to make it worthwhile for the lender. Tracker mortgages tend to only last between two and five years, although some last for the duration of the deal. With tracker mortgages, it is important to bear in mind that your rate can go up or down very quickly, so it can be hard to budget if you do not keep an eye on base rates yourself.
Sometimes, special features can be tacked on to both fixed rate and variable rate mortgages. These are designed to help with cash flow, or to help you pay off your mortgage quicker. These include:
With an offset mortgage, your savings account is directly intertwined with your mortgage. Your savings will go towards reducing the size of the mortgage, so you will only pay interest on the actual mortgage loan amount, minus the amount you have in your savings. For example:
You have a £150,000 offset mortgage at 2% interest. You have £15,000 in your offset savings account.
The £15K is subtracted from the £150K, meaning you only pay interest on the remaining balance, which in this case is £135K.
Instead of earning interest on your savings (£15K), this interest is removed from your debt, you do not have to pay the 2% interest on £15K of your debt.
It is worth noting that offset mortgages are not ideal for those who depend on their savings interest as income, as you will not be receiving this interest in the same way. However, due to the nature of this type of mortgage, you will end up paying off the entirety of the mortgage quicker.
When you take out a cashback mortgage, the lender will give you some cash as an incentive when you enter into the deal. The amount of cash you receive will likely be a proportion of the mortgage amount, or may also be a fixed amount. An obvious benefit of this is that you can use the lump sum you are given to help with moving costs, or for making home improvements. This being said, cashback mortgages usually charge a higher interest rate.
These are the main types of mortgage available in the UK. Some are better suited to first time buyers, while others are better for those with large savings. Some are better for monthly budgeting, while others seek to save you money on the interest you pay. If you are looking for a mortgage deal, get in touch with a mortgage advisor to see which one best suits your circumstances.
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