Mortgages: Types of mortgages in UK market
posted 10th March 2024
Types of mortgages in UK market
The UK mortgage market is a complex and constantly evolving landscape. With so many different types of mortgages on offer, it can be challenging to understand which one is right for you. Here we explore the different types of mortgages available in the UK market.
1. Fixed-rate mortgages:
This type of mortgage offers a fixed interest rate for a set period of time, usually between two and ten years. This means that your monthly payments stay the same, which can make budgeting easier. However, if interest rates fall during the fixed term, you won't benefit from the lower rates.
2. Tracker mortgages:
This type of mortgage tracks the Bank of England base rate. The interest rate you pay is set at a fixed percentage above the base rate, which means that if the base rate rises, so does your interest rate, and your monthly payments will increase. However, if the base rate falls, so does your interest rate.
3. Discount mortgages:
This type of mortgage offers a discount off the lender's standard variable rate (SVR) for a set period of time, usually two to five years. The discount varies, but it can be as much as 2% off the SVR. The advantage of this type of mortgage is that your monthly payments will be lower than if you were paying the SVR. However, when the discount period ends, your interest rate will revert to the lender's SVR.
4. Standard variable rate mortgages:
This is the lender's standard interest rate, which can go up or down at any time. Your monthly payments will fluctuate with the rate, which can make budgeting difficult. However, some lenders offer flexibility with this type of mortgage, allowing you to make overpayments or pay it off early without penalty.
5. Offset mortgages:
This type of mortgage allows you to use your savings to reduce the amount of interest you pay. Your savings are offset against your mortgage debt, which means you only pay interest on the difference. For example, if you have a mortgage of £150,000 and savings of £30,000, you would only pay interest on £120,000. This can help you pay off your mortgage faster and save money on interest.
6. Interest-only mortgages:
With this type of mortgage, you only pay the interest on the loan, not the capital. This means that your monthly payments are lower, but you will need to repay the capital at the end of the term. Interest-only mortgages are rare these days and are only available to those who can prove they have a viable repayment strategy in place.
7. Buy-to-let mortgages:
This type of mortgage is for those who want to buy a property to rent out. The interest rates on buy-to-let mortgages are typically higher than for residential mortgages, and the deposit required is usually higher too. Lenders will also look at the potential rental income of the property when deciding whether to offer a mortgage.
In conclusion, choosing the right type of mortgage is essential to ensure you get the best deal for your needs. Consider your financial situation and long-term goals when deciding which type of mortgage to go for. Seek advice from a mortgage broker if you're unsure which type of mortgage is right for you. Remember, taking out a mortgage is a significant financial commitment, so take the time to research and choose the right option for you.