Different Types Of Mortgages
When it comes to buying a home in the UK, understanding the different types of mortgages available to you is as crucial as selecting the right property.
Mortgages are not one-size-fits-all, and choosing the wrong type can be a costly mistake.
Let’s explore the different types of mortgages in the UK, helping you to make an informed decision that aligns with your financial situation and homeownership goals.
A fixed-rate mortgage is the steadying hand for many homeowners. It offers the security of knowing exactly what your monthly payments will be for a set period, typically between two to five years, although longer terms are available.
This type of mortgage protects you from any interest rate rises, making budgeting easier. However, if interest rates fall, you won’t benefit from the reduction.
When the fixed term ends, you’ll usually be moved onto the lender’s standard variable rate (SVR), which is often higher.
Unlike fixed-rate mortgages, variable-rate mortgages fluctuate with the lender’s SVR, which means your monthly payments can go up or down.
There are several sub-types within this category:
- Standard Variable Rate (SVR) Mortgages: The SVR is a rate set by the lender and can change at any time, often influenced by the Bank of England’s base rate. There’s flexibility, as you’re not typically locked in and can overpay or leave at any time without a penalty.
- Tracker Mortgages: These are directly linked to the Bank of England’s base rate plus a set percentage. If the base rate goes up, so does your mortgage rate, and vice versa. Tracker mortgages offer transparency and are straightforward, but they lack the payment stability of a fixed-rate mortgage.
- Discount Mortgages: These offer a discount off the lender’s SVR for a certain period. While initially cheaper, the rates can increase at any time if the SVR changes.
With an interest-only mortgage, you only pay the interest on the loan each month.
The capital balance remains unchanged, and you’ll need a plan to repay it at the end of the term, such as investments or selling the property.
This type of mortgage can be risky if you don’t have a reliable repayment strategy in place.
A capped-rate mortgage is a variable-rate mortgage but with a safety net.
It ensures that your interest rate won’t rise above a certain level, or ‘cap,’ while still allowing you to benefit if rates fall.
This type of mortgage offers a blend of security and the potential for savings, but capped rates are usually set higher than standard fixed rates.
Offset mortgages link your savings and current account to your mortgage so that you only pay interest on the difference.
For example, if you have a mortgage of £200,000 and savings of £20,000, you pay interest on £180,000.
This can save you a significant amount of interest over the term of your mortgage and potentially shorten the term. However, you won’t earn interest on your savings.
First-Time Buyer Mortgages
These are not a separate category of mortgage by type, but rather a suite of mortgage products designed to help first-time buyers onto the property ladder. They often come with incentives like:
- Lower deposit requirements
- Discounted fees
Government Mortgage Schemes
There are several government-backed schemes that can help you purchase a home:
- Help to Buy: This option is aimed at first-time buyers, this scheme allows you to buy a home with just a 5% deposit, with the government offering an equity loan of up to 20% (40% in London) of the property’s value. Unfortunately, this scheme is now not available.
- Shared Ownership: The shared ownership scheme allows you to buy a share of a home (between 25% and 75%) and pay rent on the remaining share. You can buy bigger shares when you can afford to.
- Lifetime ISA: This is a savings account where the government adds a 25% bonus to your savings, up to a maximum of £1,000 per year, which can be used towards buying your first home.
This scheme is for those who are looking to purchase a property to rent out.
This mortgage is assessed based on the potential rental income as well as your own income and usually requires a higher deposit than other residential mortgages.
Choosing the right mortgage is as critical as finding the perfect home. It’s essential to consider not just the headline interest rate but also the flexibility, fees, penalties, and the potential for rate changes over time.
Always calculate the overall cost over the term of the deal, not just the initial rate or monthly payment.
Before making a decision, it’s wise to consult with a mortgage advisor who can offer tailored advice based on your personal circumstances. Our Sales Consultants will be able to provide you with details of our recommended mortgage advisors (IFAs) who specialise in new build. They are completely independent, and you are of course free to choose an alternative, but given their familiarity with our developments, homes and processes they are in an excellent position to advise you and help find the very best financial package to suit your needs.
Remember, a mortgage is a long-term commitment, and what seems like the cheapest option now might not be the most cost-effective over time.