Updated: 31/10/2024
General Overview of the Different Types of UK Mortgages
There are quite a number of mortgage options out there, so let us give you some guidance through an overview of UK mortgage products. The most popular and some that may not be…
Fixed Rate Mortgages
- The interest rate you pay for a Fixed Rate Mortgage will stay fixed for the length of the deal no matter what happens to the interest rates.
Advantages:
- Peace of mind that your monthly payments will stay the same which will help you to budget your money every month.
- If the interest rates rise, you can be certain yours will stay the same.
Disadvantages:
- Fixed-rate Rate Mortgage deals are usually slightly higher than variable-rate Rate Mortgages but not generally Standard Rate Mortgages.
- If interest rates fall, you won’t benefit from the saving.
Caution:
- Charges will occur if you leave the deal early, as you are tied in for the fixed period agreed.
- Once the fixed period finishes, you will be automatically moved onto the lender’s Standard Variable Rate (SVR) which is generally higher.
Variable Rate Mortgages
Variable Rate Mortgages, the interest rate can change at any time. You should make sure you have sufficient funds or income to cover the increase so that you can afford your payments should this occur. Variable Rate Mortgages come in various forms.
Standard Variable Rate (SVR)
The Standard Variable Rate is the standard interest rate your mortgage lender charges homebuyers and it will last as long as your mortgage or until you take out another mortgage deal. Changes in the interest rate might occur after a rise or fall in the base rate set by the Bank of England and this would result in your monthly payments changing also.
Advantages:
- Freedom – you can overpay or leave at any time.
- If the interest rate goes down your mortgage payments may do so as well.
Disadvantages:
- Your rates can increase at any time during the loan causing you to be unable to afford the new payments.
Discount Mortgages
Discounted Mortgages are a discounted rate set at a certain amount below the lender’s Standard Variable Rate and apply for a certain length of time from the start of the deal.
Advantages:
- Cost, the rate starts off cheaper which will keep monthly repayments lower.
- If the lender cuts the SVR you will pay less each month.
Disadvantages:
- Budgeting – the lender is free to raise its SVR at any time If the Bank of England base rates rise, you will probably see the discount rate rise too.
Caution:
- You could have charges applied to your outstanding loan if you want to leave before the end of the discount period.
Tracker Mortgages
Tracker Mortgage Meaning and Lifetime Tracker Mortgage Meaning:
Tracker Mortgages move directly in line with another interest rate which is normally the Bank of England’s base rate plus a %. So if the base rate goes up or down by 1% your rate will go up by the same amount, typically they can last between 2 to 5 years, though some lenders offer trackers which last the lifetime of the mortgage or until you switch to another deal.
Advantages:
- Tracker Mortgages are cheaper when the Bank of England rate is low.
- If the rate it is tracking falls so will your mortgage payments.
Disadvantages:
- Rates can change often, therefore, making it difficult to budget.
- If the rate it is tracking rises so will your mortgage payments.
- You might have to pay an early repayment charge if you want to switch before the deal ends.
Caution:
- You could have charges to pay if you want to leave before the end of the deal.
Capped Rate Mortgages
With Capped Rate Mortgages, your rate moves in line normally with your lender’s SVR but the cap means the rate can’t rise above a certain level.
Advantages:
- Your rate won’t rise above a certain level but ALWAYS make sure you could afford repayments if it rises to the level of the cap.
Disadvantages:
- The cap tends to be set quite high
- The rate is generally higher than other variable and fixed rates and your
- Your lender can change the rate at any time up to the level of the cap.
Offset Mortgages
Offset Mortgages work by linking your savings and current account to your mortgage so that you only pay interest on the difference. You still repay your mortgage every month as usual, but your savings act as an overpayment which helps to clear your mortgage early.
Advantages:
- You still repay your mortgage every month as usual and pay it off quicker because you reduce the amount owed by taking into account your savings.
- You can choose to reduce your monthly payments.
- You can overpay each month.
- You can still make withdrawals on your savings whenever you wish.
Disadvantages:
- Not ideal for those relying on their savings interest to boost their income.
- Offset mortgages don’t usually offer any other discounted rate deals.
- You won’t earn interest on your savings.
- Often may need a higher deposit
What is an Example of a Mortgage?
Example: You have £200,000 offset mortgage at 3% interest, and you also have £10,000 savings in an offset account. The £10,000 is subtracted from the £200,000 so you only pay interest on £190,000.
Current Account Mortgages
Current Account Mortgages is a type of offset mortgage with the difference being, your current account and mortgage are merged into one.
Advantages:
- You can use the money in your current account to reduce your monthly payments.
- You could potentially pay off your mortgage quicker.
Disadvantages:
- No other discounts are generally offered.
- Normally the interest rate is higher.
- To benefit from this type of mortgage you really need a large income being paid into the account
each month.
Example: Your mortgage is £200,000 and you have £2,000 in your current account, your statement will show a balance of £198,000.
Cashback Mortgages
With Cashback Mortgages, you are given a cashback amount when you take out the mortgage. The amount will be a proportion of the total you are borrowing, ie: 2% or it could be a fixed amount, ie: £700 – You will receive the cashback after completion.
Advantages:
- You can use a lump sum to help with costs, for example, furniture, decorating, and any repairs to your new home.
Disadvantages:
- Early repayment charges may occur.
- High arrangement fees can often outweigh the cashback received.
- Cashback mortgages often charge a higher interest rate than other mortgages.
Overview of UK Mortgage Products
There you go, quite a number of options available to the potential homebuyer, and hopefully, we have covered them in a way in which they make sense to everyone!
If you are considering a mortgage in the UK, and we can help in any way, please do not hesitate to get in touch HERE.
Updated 2024