Mortgages are there to help cover the considerable costs involved when buying a home. The good news is that UK residents have access to a wide variety of mortgages. As a result, you must be aware of all the options before you apply for one. They have different features, which means one may benefit you more than others.
In this guide, we will take you through the main UK mortgages on the market today, relaying some of their pros and cons.
Repayment vs. Interest-Only Mortgages
These two terms refer to how your mortgage loan is repaid. Generally speaking, most mortgages are repayment mortgages. This means that each month, you pay a portion of the loan, along with interest. Over time, you eventually pay back the full sum of the loan - plus all the interest.
Interest-only mortgages are slightly different. Instead of paying the loan back bit by bit, your repayments only cover the interest. This is beneficial as your monthly payments will be much lower. But, the flip side is that you have to pay the full loan amount back at the end of the mortgage period. With repayment mortgages, the loan is paid back incrementally with interest.
Unless a mortgage product states that it’s interest-only, then it will fall under the category of a repayment mortgage - so keep that in mind.
Fixed rate mortgage interest rates stay the same throughout the loan period.
Fixed-Rate Mortgages
A fixed-rate mortgage is a mortgage with an interest rate that stays the same throughout the loan period. Most lenders will advertise these mortgages by stating the fixed-length period.
The advantage of this is that you know what your monthly payments will be, which lets you form a budget. Plus, there’s no danger of the interest rates going up.
The downside is that the interest rate will never decrease. So, if interest rates fall across the board, you won’t benefit. Additionally, fixed-rate mortgages tend to have higher rates than variable ones.
We also recommend that you pay attention to the fixed period. Once that ends, you’ll be moved onto a standard variable rate. So, it’s beneficial to look for a new mortgage deal before this period runs out.
The interest rate of a variable rate mortgage can vary depending on the kind of mortgage it is.
Variable Rate Mortgages
The next mortgage category is far more diverse than fixed-rate mortgages. Here, we’re looking at mortgages where the interest rate can alter. It can go up, but it can also go down. This can be both beneficial and problematic, and there are many different variable rate mortgage types:
SVR (Standard Variable Rate)
SVR is the most common variable rate mortgage on the market. Your lender charges a rate, and this lasts all the way through the mortgage duration. It can fluctuate depending on market forces, meaning you may start paying more, or you could pay less.
The key advantage of an SVR mortgage is that you’re free to leave whenever you want and seek out a better deal. You won’t incur penalty fees, and you can move to a different mortgage if the interest rates get too high for your liking.
Obviously, the main issue is that your interest rate can change with almost no notice. If the Bank of England changes the base rate, then your mortgage may shoot up and cause potential budgeting issues.
Tracker
A tracker mortgage works by tracking a specific interest rate. More often than not, it tracks the Bank of England’s base rate. When this rate goes up, so does your tracker mortgage rate - and the same happens when the tracked rate goes down.
Tracker mortgages don’t usually last the full loan duration, they usually have a set lifespan of between two to five years. The main advantage is that your mortgage payments can decrease substantially if the tracked rate drops.
On the other hand, if it rises, then you’ll pay more. Plus, tracker mortgages usually add a few more percent onto the tracked rate, so you won’t actually be paying the same interest rate as the one it’s tracking. There can also be issues with charges and penalty fees if you want to switch before your loan deal ends.
Discount Rate
This variable rate mortgage is usually reserved for first-time buyers. In essence, you get a discount off the SVR. Typically, the discount period will last a few years - the higher the discount, the shorter the period will be.
As with an SVR mortgage, the interest rate can go up or down. But, the amount you pay stays at your discount level in correlation with the rise/fall of the SVR. When the discount period ends, you’re put on the SVR, and your payments will increase - so keep that in mind.
The clear advantage is that you pay less during the discount period. But, you will struggle to leave before the discount period is over as there are some very substantial penalty fees. You’ll have to wait until you end up on the SVR, then you can seek another deal - if you wish.
Capped Rate
Capped rate mortgages have a limit to which your interest rate can rise. It’s still a variable mortgage, and your rate will usually move alongside the lender’s SVR. So, when the SVR increases, so does your capped rate mortgage. The difference is that it can’t go above a certain limit, which is potentially beneficial.
With a cap, you know that your rate will never go exceedingly high. So, it could be cheaper than risking a standard variable rate. Plus, you still get the benefit of a variable mortgage as the rate can drop as low as it likes - there’s no cap there!
The disadvantage is that caps are pretty high anyway. Also, they can be raised at will, and the rate you’re put on is normally higher than the SVR anyway.
Making a decision about which direction to go in your mortgage type is the first step.
As you can see, there’s a lot to consider when getting a mortgage. The first decision is to decide how you want to repay this loan; interest-only, or the typical repayment set-up. Then, consider what type of mortgage rate you want; fixed or variable. If you choose variable, then look at the different options and choose one that you think suits you the most.
