Taking out a mortgage is one of the biggest financial decisions you’re likely to make in your lifetime, so it’s worth getting it right! Choosing the right type of mortgage is crucial, but with hundreds of options, it can be confusing, especially for first-time buyers.
We've put together this guide to explain different types of mortgage loans available in the UK and help you find one that suits your needs.
What is a mortgage?
A mortgage is a loan you can use to purchase a house. Mortgages are usually provided by a bank, although the lender does not have to be the same bank that you hold accounts with. When you sign up for a mortgage, you arrange to pay off the loan in monthly instalments.
A mortgage is the most common method of purchasing a house in the UK. Mortgages often take the place of rent in your budget, with the added bonus that the property belongs to you rather than a landlord. Once the loan is paid off, you’ll be released from the mortgage contract, and you won’t have to make any additional payments to keep your home.
What are the different types of mortgages?
Every mortgage plan is different. You should always speak to a mortgage advisor when you’re organising your finances in order to get the best deal - an expert will be able to help you make the right decision for your future.
Because the property climate is always changing, we recommend getting professional mortgage advice even if this isn’t your first time purchasing a house.
Fixed-rate mortgages
A fixed-rate mortgage offers a set rate of interest for a predetermined period of time. You will have the option to choose this term, although the longer it is, the more likely that the interest rate will be higher: for instance, a fixed term of two years will have lower repayments than a term of five. After this period of time, your mortgage interest will change to a variable rate. You’re free to renegotiate with your bank after the fixed term is over, but you cannot change the terms of the agreement beforehand.
A fixed rate mortgage is relatively low risk. Your payments may be higher than variable rates, but they’re guaranteed to be predictable. If you’re a strict budgeter, a fixed rate will help to keep your bank account safe from surprises.
Tracker mortgages
A tracker mortgage offers variable repayments that track the base rate of the Bank of England, the percentage that the BofE charges other banks for loans. This rate fluctuates up to eight times a year depending on several financial factors, which means that your tracker mortgage rates may also change frequently. These fluctuations ‘track’ the Bank of England at a set percentage above its base rate. In some cases, your set percentage will last for the lifetime of the mortgage. In others it could last for a set number of years, after which you can re-mortgage your home.
A tracker mortgage can offer you relatively low rates compared to other mortgage types. While a tracker mortgage offers the risk of raised rates, you may also enjoy lower repayments if the base rate goes down.
Standard variable rate mortgages
The standard variable rate (SVR) mortgages are similar to tracker mortgages, but do not track the base rate of the Bank of England. This means that your mortgage repayments are solely dependent on your lender and can fluctuate at any time. An SVR rate is likely to replace a tracker or fixed-rate mortgage once the initial term runs out and may cause your payments to go up.
When buying a house, you won’t typically look at SVR mortgage rates. If you do, you should discuss with a mortgage or financial advisor whether the benefits will outweigh the costs. SVRs usually kick in when discounts and deals reach the end of their term.
Discount mortgages
To make SVR mortgages more attractive to buyers, many lenders will offer discounted rates for an introductory term. Discounted mortgages fluctuate with the lender’s rates, although your repayments will remain lower than the original SVR rate until you reach the end of the discount period.
A discount mortgage is an affordable option for the short term; if you’re confident that you’ll be able to pay higher rates at the end of the discount, you could make savings during your initial term. Discounted mortgages are one of the most unpredictable mortgage types, however, and access to lower rates may come with caveats such as early repayment charges (ERCs). Keep in mind that fees should be factored into the costs of the mortgage, so a discount that might seem like a bargain could end up costing you a lot more in the long run. If you go in for the discount, you should start shopping around for alternative offers when your SVR rate kicks in.
What type of mortgage should you get?
Only you or a professional advisor can decide on the best type of mortgage for you. The benefits and disadvantages of each mortgage type may outweigh each other depending on your personal finances: for instance, if you want to pay off your mortgage sooner rather than later, higher repayments may be more attractive than immediate savings.
You should always consider your future financial circumstances before you sign a mortgage agreement. If you lose your job, acquire additional costs or your mortgage rate rises above the affordable margin, consider whether your mortgage contract would continue to be sustainable. If you aren’t sure, you should speak to a financial advisor before deciding on your contract.
Are there upfront costs to a mortgage?
When buying a house, there will always be upfront costs to cover. Your house deposit, laundering checks, stamp duty and solicitor’s fees all require additional payments, and your mortgage is no different. You will always pay more on the first month of your mortgage - this is unavoidable and is due to accumulated interest from your completion month. Other than that, you should read the terms and conditions of your mortgage carefully to find out about additional costs and charges.
How to apply for a mortgage?
Your mortgage application depends on your chosen mortgage type, the bank you want to mortgage with, and the home you’re buying. Your mortgage advisor may handle this process for you, but you can also apply yourself if you have all the necessary documentation.
You can also speak to your Homes Adviser if you need help choosing an independent mortgage advisor for your new Anwyl home.
