A mortgage is a mortgage, right? Well, there’s more to it than just being a long-term loan to buy a house. There are different types of mortgages available in the UK and some will suit you better than others.
The right mortgage for you is all down to your own situation and the economic situation at the time you take out your mortgage. While we will always discuss the types of mortgages available with you at our free discovery meeting, it’s always worth knowing in advance what is available.
So, here’s all you need to know…
What are the different types of mortgages?
We work with a lot of first-time buyers and they are often surprised by the different types of mortgages available.
Mortgages are usually within two categories: fixed-rate deals and variable rate deals. The first means your mortgage interest rate is set for a number of years. Variable rates mean the rate follows Bank of England interest rates, so they can go up and down, meaning your monthly payments can change.
Click here to read a blog where we’ve already looked at interest rates.
As we’ve said above, if you take out a mortgage with a fixed rate, you’ll pay the same interest rate for a set number of years. The set period is usually 2 years or 5 years, but there are some mortgages that can be fixed for 7, 10 or even 15 years!
Because you pay the same interest rate, your monthly payments stay the same regardless of what’s happening to the Bank of England base rate.
When you come to the end of the set period, you then need to remortgage. The interest rate you pay will depend on the economic conditions at the time. If you don’t remortgage, you will be moved to your lender’s standard variable rate (SVR). This will usually be more expensive, so it’s wise to remortgage.
These mortgages track the Bank of England’s base rate plus a set percentage. For example, if the base rate is 2% and your mortgage rate is ‘base rate plus 2%’ you’ll be paying 4% in interest.
If the Bank raises its base rate, then your mortgage payment will rise. For example, if the rate rises by 0.25% you’ll be paying 2.25% plus 2%.
If the Bank cuts its base rate, your mortgage payment might also go down. It isn’t always the case, however, as some tracker mortgages include a ‘collar’, meaning the rate will only fall to a set level.
Trackers also have an introductory period, so you will be moved to the lender’s SVR if you don’t remortgage.
A discount mortgage is a variable-rate deal which is charged your lender’s SVR minus a fixed rate. So if your lender’s SVR is 5.5% and the deal is ‘SVR minus 2%’ then you’ll pay 3.5%. The SVR can change if the base rate goes up or down. Discount mortgages usually come with an introductory deal period of 2 years.
Standard variable rate mortgages
Each lender has its own standard variable rate (SVR) and they set it where they want. It isn’t linked to the Bank of England base rate but is often affected by it.
The rate is usually much higher than the rate you’ll be able to get on a fixed, tracker or discount rate mortgage.
Which mortgage is best for me?
When meet clients, we’ll look at your situation and ask for some information about your finances and check your budget. After collating all the information, we will advise on the best mortgage deal for you. But to help you, it’s worth considering whether:
- Your income is likely to change
- You want your monthly payments to be the same each month
- You’re able to manage if monthly payments increased
Repayment v interest-only mortgages
Most people choose a repayment mortgage, which means you’re paying off some of the loan as well as some interest each month.
But you can also choose an interest-only mortgage, which means you’re only paying off the mortgage. This usually means a lower payment each month, but at the end of the mortgage term, you still have the entire loan to pay off. These are much less common these days.
As the name suggests, these mortgages are taken out if more than one person is buying a property. This is usually when you’re buying with your partner, friend or family member.
You are both responsible for making payments and both names will be on the mortgage agreement and property deeds.
You might be able to access some specialist mortgages if you meet eligibility criteria. Some of the main types include:
- Mortgages for self-employed buyers. Being self-employed can make it harder to secure a mortgage. If you are, then check out earlier blog about mortgages for the self-employed.
- Bad credit mortgages. If your credit rating is low, then you may need to get a specialist lender to offer a mortgage.
- Guarantor mortgages. To get a foot on the property ladder, you may need to ask a family member or parent to use their savings or a property to guarantee your home loan.
Whatever kind of mortgage deal suits you best, it’s always worth speaking to a broker, who has access to more deals than you can whether through a high street bank or comparison sites. To speak to one of our team, use our contact form.
Your home may be repossessed if you do not keep up repayments on your mortgage.