12th December 2023
(information contained within was correct at the time of publication but is subject to change)
If you’re hoping to buy a home, it’s worth knowing the different types of mortgages that are available in the UK. This is because different mortgages achieve the same goal, but work in different ways.
As mortgage specialists, we know that some types of home mortgages will suit individuals better than others. And with all of the different mortgage types, it can be confusing to someone who is researching this topic for the first time.
In this article, you’ll learn of the different main types of mortgages in the UK – what they’re called and how they work. This will allow you to start to think about which mortgage you should choose, leading you to the next step of finding a mortgage broker who can help you get the mortgage you want.
Fixed-Rate Mortgage
When a property is purchased via a mortgage, you are essentially borrowing the remaining cost of the home, minus your deposit, from your chosen bank or building society. In return for doing so, you will have to pay your lender interest on top of your repayment.
In times of high-interest rates, a fixed-rate mortgage will be seen as desirable. As with this mortgage type, the interest rate on your mortgage will stay the same until the end of your deal period. This is unlike tracker mortgages as interest rates on these types of mortgages are not fixed.
As we mentioned above, interest rates are only fixed for the length of your deal. Deals such as this can be two, three, five, or even ten years long. However long your benefit period is, when it’s over you will either be moved onto your lender's standard variable-rate (more on this later), or you and your mortgage advisor would shop around for a better deal to move to before your benefit deal end date.
Fixed-rate mortgages are generally seen as more convenient and safer than other mortgage types. These are not affected by the Bank of England – or your lender’s – rates. If the interest rate increases for others, yours will not.
Though, this works both ways. If the interest rates fall, then your fixed rate will stay the same and you could miss out on potential savings. If you feel your fixed-rate mortgage is no longer the most affordable option for you and you want to switch, watch out for early repayment charges.
Ultimately, with a fixed rate mortgage, this allows for easier budgeting and the fixed monthly amounts can provide homeowners with safety and security.
Tracker Mortgage
A tracker mortgage is different from a fixed-rate mortgage as it is a type of variable-rate mortgage. With this type of mortgage, the Bank of England base rate is tracked and influences how much interest you pay. This means that if the base rate rises, so will your interest rate, which will raise your repayment amounts. Again, this works both ways should the base rate fall.
Tracker mortgages are unique in the sense that they are tied to the Bank of England’s base rate, this means that your interest rates will only change if the Bank of England base rate changes.
Though tracker mortgages are tied to the Bank of England base rate, the amount of interest you pay may be the base rate plus a percentage set by your lender. These percentage points will vary and are based on multiple factors, such as market conditions, your loan to value and competing lenders.
Deals such as this can last anywhere from two years to the lifetime of the mortgage, however, two years is the most commonly available. Once it’s over, you’ll likely be moved onto your lender’s standard variable-rate (SVR). Or you and your mortgage advisor would shop around for a better deal to move to before your benefit deal end date.
A handy thing to keep in mind is that it is not uncommon to find some tracker deals that do not have an early repayment charge.
Tracker mortgages are a popular type of home mortgage in the UK, but it’s always best for you to consult a mortgage broker before making a decision. As with any mortgage deal, we also advise that you know exactly what you’re signing up for before making a decision.
Standard Variable-Rate Mortgage (SVR)
It is rare to jump straight onto a standard variable-rate mortgage. Usually, you will be put onto an SVR when your current fixed-rate or tracker mortgage ends.
A standard variable-rate is something all mortgage providers have and they often come with high interest rates. Because of this, a mortgage specialist will likely advise you to remortgage or switch to a better deal before your current one ends.
As a variable-rate mortgage, this is similar to a tracker mortgage – both interest rates are not fixed with these types of mortgages.
A standard variable-rate mortgage comes with interest rates that are set by the lender, meaning your monthly mortgage repayments can go up or down. With all of the different kinds of mortgages available, it’s likely that an SVR isn’t the best choice for you. In any case, speaking to an expert mortgage advisor will help you see what alternative you have at your disposal.
Discounted Variable-Rate Mortgage
We’ve learned that a lender’s SVR is influenced by the Bank of England’s base rate but it isn’t tied to it. This means that an SVR interest rate can change at any time. We’ve also learnt that a tracker mortgage will track the Bank of England base rate and is tied to it.
A discounted variable-rate mortgage is different to these types of mortgages but works similarly. Instead of tracking the Bank of England base rate, a discounted variable-rate will track a lender’s SVR at a discounted rate.
With this type of mortgage, you are essentially paying a lender’s SVR but at an amount lower than the lender’s SVR for a defined period. The length of these deals is typically two years, however, these are available from a benefit period of two years to the lifetime of a mortgage.
For example, if a lender’s SVR is 7% and you have a discount of 1.5%, your interest rate is 5.5%.
Though a discounted variable-rate may sound ideal to you, remember that these aren’t fixed-rate mortgages. The amount you pay can still change each month if the SVR goes up or down. This can either be a good or bad thing depending on which way it goes.
Repayment vs Interest-Only
Repayment mortgages and interest-only mortgages are the two main types of home-buyer loans available. But how are each of them different from one another, and which is the best for you?
Repayment Mortgages
When you borrow the money to buy your home, you will pay this amount off with monthly repayments. But you won’t just be paying back the amount you owe for your home, you’ll also pay interest over an agreed period. This splits your repayments into two parts.
As you pay back the capital and interest, every month, your capital debt will decrease. As long as you are able to keep up these repayments, you will be the owner of your home at the end of the agreed period of time.
It’s worth noting that a repayment mortgage will come with higher monthly payments compared to an interest-only mortgage.
Interest-Only Mortgage
With an interest-only mortgage, your monthly payments cover the interest on your mortgage only. At the end of your term, you will need to pay back the original loan amount.
The main benefit of this type of mortgage is the lower monthly payments. These payments are much cheaper as they only cover the interest of your mortgage. To be considered for an interest-only mortgage, a lender may ask for a larger deposit and evidence of a repayment plan.
Although lower mortgage repayments sound great, you will need to ensure you have the money to buy your home with one lump sum at the end of your term.
Part and Part Mortgages
Also known as a “part repayment and part interest mortgage”, this type of mortgage is a hybrid of a repayment and interest-only mortgage. With a part and part mortgage, you will pay off some of your mortgage over your term and will also pay off the remainder of your mortgage at the end of your term.
This mortgage works by splitting your loan in two: the repayment part and the interest-only part. During the term of your mortgage, you will make your agreed repayments. And at the end of your term, you will pay the interest-only portion of your mortgage.
As this kind of mortgage features part of an interest-only mortgage, you will need to prove to your lender, you can pay back the money you owe.
In conclusion
The different types of home mortgages can be tricky to understand and wrap your head around. However, knowing the basics of each can give you a better idea of which is the best mortgage for you.
Armed with this knowledge, you should arrange to speak with a mortgage broker or advisor. This way, you can ensure that you will be choosing the right mortgage for you, saving you stress and money in the long run.
To speak to a reliable mortgage advisor, reach out to the team here at Norcutt Mortgages today.
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