Types Of Mortgage
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There are various types of mortgage available in the UK and choosing the right one can you save heaps of money in the long run. Depending on your circumstances certain mortgages can help you buy your dream home or repay your mortgage quickly. Check out our guide to the various mortgage types below.
Fixed Rate Mortgages
Fixed rate mortgages are the 'classic' style. With these, your repayments are fixed and will not change no matter what happens to the financial climate.
Some lenders may offer fixed rate mortgages over a certain number of years and then switch to a standard variable rate mortgage. Often there will be a penalty for overpayments or to end the mortgage early.
A fixed rate mortgage is good if you need to budget for a given period of time, as you can shop around for the best introductory offer and still take advantage of variable rate mortgages a few years down the line.
Variable Rate Mortgages
UK mortgage lenders vary their interest rates in line with the Bank of England's base rate. This can mean repayments go up, or down, depending on the change. According to the Council of Mortgage Lenders more and more people are opting for variable rate mortgages.
A standard variable rate mortgage allows the lender to set interest rates. Changes made to the base rate will have an effect, but there may be a delay before your mortgage provider consequently alters their rate.
Other types of variable rate mortgage include the tracker, which adjusts without delay. If you want to be sure your payments track the Bank of England's base rate, you should opt for this kind of mortgage.
Tracker Mortgages
A tracker rate mortgage is usually fixed at a certain percentage above or below the Bank of England base rate. It will adjust to match rate changes made by the bank.
This can mean your payments increase, if mortgage rates go up. However, it also means they will decrease if rates fall. If you are certain you can meet any increase, and are willing to gamble on a decrease, a tracker mortgage could work for you.
Some lenders offer a capped rate. That means the mortgage rate is guaranteed not to go above a certain level, no matter what happens to the base rate, but will still fall if the base rate goes down. Others may let you switch to a fixed rate mortgage if repayments get too high.
Offset Mortgages
If your current or savings account is in credit, this might be a good solution. Under the rules of an off-set mortgage, your balance cancels out some of your borrowing and you just pay interest on what's left.
Your mortgage behaves as though you have put every penny you have into paying it off, but you still have access to your money. Some lenders will provide this kind of mortgage without insisting that you bank directly with them.
The risk with an off-set mortgage is that, if you spend any of your savings, the amount of interest-free borrowing will decrease. However, if you expect to be in credit over the full term, it is a good way of keeping payments down.
Repayment Mortgages
A repayment mortgage costs more, but guarantees ownership of your home at the end of the term. Monthly repayments go towards clearing the interest and paying back your initial borrowing.
In this way, if you choose to move house partway through the term, you will only have to pay off the remainder of what you owe. This may mean you can borrow less against your new property, or take a new mortgage out over a shorter term.
Some people choose to take out an interest-only mortgage to begin with, then switch to a repayment mortgage when they have more spare cash. If you are experiencing temporary financial problems or expect a wage increase in the future, this might be a good solution.
Interest Only Mortgages
In an interest-only mortgage, your monthly payments cover the cost of the interest, but you do not pay off the capital value of your home. This is a good way of keeping repayment costs down, but may be a gamble in the long run.
At the end of the mortgage term you will be required to pay off any outstanding amount. Usually this will be the amount you borrowed in the first place. If you cannot pay off the remainder, you will be at risk of losing your home.
You may choose to save over the term of the mortgage. This does not have to be arranged through your lender, although they may offer you a number of investment options designed to clear your debt.
Fixed Rate Mortgages
Fixed rate mortgages are the 'classic' style. With these, your repayments are fixed and will not change no matter what happens to the financial climate.
Some lenders may offer fixed rate mortgages over a certain number of years and then switch to a standard variable rate mortgage. Often there will be a penalty for overpayments or to end the mortgage early.
A fixed rate mortgage is good if you need to budget for a given period of time, as you can shop around for the best introductory offer and still take advantage of variable rate mortgages a few years down the line.
Variable Rate Mortgages
UK mortgage lenders vary their interest rates in line with the Bank of England's base rate. This can mean repayments go up, or down, depending on the change. According to the Council of Mortgage Lenders more and more people are opting for variable rate mortgages.
A standard variable rate mortgage allows the lender to set interest rates. Changes made to the base rate will have an effect, but there may be a delay before your mortgage provider consequently alters their rate.
Other types of variable rate mortgage include the tracker, which adjusts without delay. If you want to be sure your payments track the Bank of England's base rate, you should opt for this kind of mortgage.
Tracker Mortgages
A tracker rate mortgage is usually fixed at a certain percentage above or below the Bank of England base rate. It will adjust to match rate changes made by the bank.
This can mean your payments increase, if mortgage rates go up. However, it also means they will decrease if rates fall. If you are certain you can meet any increase, and are willing to gamble on a decrease, a tracker mortgage could work for you.
Some lenders offer a capped rate. That means the mortgage rate is guaranteed not to go above a certain level, no matter what happens to the base rate, but will still fall if the base rate goes down. Others may let you switch to a fixed rate mortgage if repayments get too high.
Offset Mortgages
If your current or savings account is in credit, this might be a good solution. Under the rules of an off-set mortgage, your balance cancels out some of your borrowing and you just pay interest on what's left.
Your mortgage behaves as though you have put every penny you have into paying it off, but you still have access to your money. Some lenders will provide this kind of mortgage without insisting that you bank directly with them.
The risk with an off-set mortgage is that, if you spend any of your savings, the amount of interest-free borrowing will decrease. However, if you expect to be in credit over the full term, it is a good way of keeping payments down.
Repayment Mortgages
A repayment mortgage costs more, but guarantees ownership of your home at the end of the term. Monthly repayments go towards clearing the interest and paying back your initial borrowing.
In this way, if you choose to move house partway through the term, you will only have to pay off the remainder of what you owe. This may mean you can borrow less against your new property, or take a new mortgage out over a shorter term.
Some people choose to take out an interest-only mortgage to begin with, then switch to a repayment mortgage when they have more spare cash. If you are experiencing temporary financial problems or expect a wage increase in the future, this might be a good solution.
Interest Only Mortgages
In an interest-only mortgage, your monthly payments cover the cost of the interest, but you do not pay off the capital value of your home. This is a good way of keeping repayment costs down, but may be a gamble in the long run.
At the end of the mortgage term you will be required to pay off any outstanding amount. Usually this will be the amount you borrowed in the first place. If you cannot pay off the remainder, you will be at risk of losing your home.
You may choose to save over the term of the mortgage. This does not have to be arranged through your lender, although they may offer you a number of investment options designed to clear your debt.
To compare the latest mortgage rates from leading UK lenders click here.
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 ING Direct Mortgages |
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| Woolwich mortgages |
Yorkshire Building Society mortgages |
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