There are three types of mortgage loans available in the UK, and each varies substantially. Deciding which mortgage type to opt for can be tough and isn’t one that should be taken lightly, because if you fail to keep up with your loan repayments, you may face losing your home.
As a result, it is important to conduct thorough research to find out which type of mortgage is best for you. A few things you must consider include:
- Your financial situation (how much you earn each month, after taxes, bills)
- How long you would like to be repaying your mortgage loan for
Read on to find out all about the different types of mortgage loans available in the UK.
These are the 3 types of mortgage loans available in the UK:
Fixed rate mortgages
A fixed rate mortgage is a mortgage where the interest rate stays the same for the entire period, regardless of whether the interest rate changes.
This type of mortgage may be perfect for you if you would prefer to repay a set amount of money each month for a set amount of time, to avoid any spikes in interest for instance.
Generally speaking, fixed rate deals can last anywhere between one year and 10 years, although homeowners are most likely to opt for two- or five-year deals. The longer the length of the fixed rate deal and the higher the interest rate will be, because a mortgage lender will be unable to predict what will happen to the market over time. As a result, you are essentially paying for the security of knowing that your rate won’t go up, no matter what happens.
One-year fixed rate mortgages are much less common and tend to only be available for people who have specific requirements, such as those buying with a Help to Buy equity loan from the government.
What happens when your fixed-price deal ends?
When your fixed-rate period ends, you’ll be moved to your lender’s standard variable rate (SVR) mortgage. Each lender sets its own SVR and they are free to change this by any amount at any given time. This is a worry for a lot of people, as it carries a lot of uncertainty and may result in you spending more money than you first thought.
As a result, before you get transferred onto your lender’s SVR, it is wise to remortgage your property on your own terms. You are able to do this with your current lender or another mortgage provider.
Variable rate mortgages
Knowing whether to opt for a fixed-rate or variable-rate mortgage will depend on if:
- You think your income is likely to change
- You prefer to know exactly what you’ll be paying each month
- You could manage if your monthly payments went up
There are two main types of variable rate mortgages, which include tracker mortgages and discount mortgages. Read on to find out more about them.
– Tracker mortgages
A tracker mortgage is a loan where the interest rate you pay is based upon an external rate and a set percentage. Often, this is based on the Bank of England.For example, if the base rate is 0.75% and the interest rate was +1%, you will experience interest of 1.75%. If the base rate increased at any time, the interest rate would also rise.
A tracker mortgage is a type of variable-rate mortgage, whereby the total amount that you pay each month may be subject to change. With each monthly mortgage payment, some of the money will go towards the interest charged by your mortgage lender, and the rest will go towards repaying the money you’ve borrowed.
If your monthly payments have increased due to a rise in the base rate, set by the Bank of England, the extra money you paid would only cover the increased interest charges. This means that you will be paying an increased amount each month, without clearing your mortgage debt.
What happens when your deal ends?
Once your tracker mortgage ends, your lender will transfer you onto its SVR mortgage – just like in a fixed-price mortgage. This means that you will be paying a higher interest rate and your monthly repayments will increase. To avoid this, it is worth remortgaging your home at the end of your deal period, which is often two or five years.
– Discount mortgages
A discount mortgage is a loan where the interest rate is set at an amount below the lender’s SVR for a set period of time (e.g. 2 to 5 years) or for your whole mortgage.
Similarly to a tracker mortgage, a discount mortgage is a type of variable rate mortgage, which means that the amount you pay could be subject to change from month-to-month. This is the result of the SVR set by your lender, which is allowed to be raised or lowered at any time by any amount.
It is worth noting that discount mortgages are offered for a limited amount of time in comparison to other mortgage types – often between two and five years. But, as a general rule, the longer the discounted period, the smaller the amount the discount tends to be.
What happens when your discounted period ends?
When this time-frame comes to an end, your lender will usually transfer you onto its SVR automatically. When this happens, your mortgage repayments will go up because you will be paying a higher rate of interest.
At this point, it is advisable to remortgage your home, either with your current lender or a new provider.
Pros and cons of the different types of mortgage:
|Fixed rate mortgages||During the deal period, your interest rate won’t rise, regardless of what’s happening to the wider market. A good option for those on a tight budget who want the stability of a fixed monthly payment.||If interest rates in the mortgage market go down, you may end up paying more than you would on a variable-rate deal. |
Furthermore, if you want to get out early, you’ll usually pay high penalties.
|Tracker mortgages||If the base rate goes down, your monthly repayments will drop too (although this is unlikely to happen in the current market). Your interest rate is only affected by changes in the Bank of England base rate, not changes to your lender’s SVR.||You won’t know for certain how much your repayments are going to be throughout the deal period.|
|Discount mortgages||Your rate will remain below your lender’s SVR for the duration of the deal. When SVRs are low, your discount mortgage could have a very cheap rate of interest.||Your lender could change their SVR at any time, so your repayments could become more expensive.|
When choosing which type of mortgage loan to go for, you must think carefully about whether you think your income is likely to change, whether you prefer to know how much money you will be paying out each month, and whether you think you can afford living costs if your monthly payments increased.
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