Picking a mortgage in the UK can be difficult given the multitude of products available. It is important to find the right mortgage for your needs, because a mortgage is a major debt to incur. Of the products available, the most common include the standard variable and fixed mortgages, capped mortgages – the list goes on. The different types of mortgages will affect how you plan your life and finances for the foreseeable future, so it is vital to understand how they work.
Variable and fixed mortgages work exactly as you would expect; with a variable mortgage – one of the most common – your interest rate fluctuates based upon the base rates set by the Bank of England, as well as the lender’s Standard Variable Rate (SVR). While the SVR is usually linked with the base rate set by the Bank of England, it tends to vary between lending institutions. Some of the advantages to variable mortgages are that they are more competitive because of how common they are, and that long-term rates are becoming more stable. Conversely, there is still the risk that the base rate will rise much higher than when you negotiate your initial mortgage; as a result, if there is a significant enough raise in base rates, borrowers may find themselves unable to pay their monthly repayments.
Fixed rates are an alternative to the common variable rate mortgage. As the name suggests, your interest rate is fixed and will not fluctuate even if the base rate set by the Bank of England goes up or down. This is advantageous especially when interest rates rise well above your initial rate, and it is easier to budget around a fixed mortgage payment. Unfortunately this also means that if there is a significant drop in base rates, you will not enjoy the benefits and you will pay a higher rate. Fixed rates are also slightly higher than a variable rate, and most people pay more for their fixed rate mortgage compared to a variable rate.
If you want the benefits of both the variable and the fixed rate mortgages, one alternative is the capped mortgage. It is a combination of both of the above mortgages. It really is the best of both worlds, as you can benefit from a low base interest rate, and at the same time cap your mortgage rate at a certain level in case of a significant increase in the base rates. In some situations there is also a lower limit as well as an upper limit, and often depends on the lender. These mortgages often come with a premium from the lender, so the savings compared to a variable or fixed mortgage may not be that significant.
An increasingly popular mortgage is the Current Account mortgage. It is a non-conventional mortgage, and is reduced when money enters into your current account. As your mortgage amount is reduced, so are your payment amounts – and in turn, you will pay less interest. However, Current Account mortgages are quite complicated and would be best to consult a financial advisor or mortgage broker before attempting to obtain one. You could also try cash back mortgages, where you receive a lump sum of cash on top of the mortgage. Cash back mortgages are popular with first-time buyers, or for houses that require a good deal of renovations.
There are many more options for obtaining a mortgage in the UK; it is in your best interest that you talk with a financial advisor or mortgage broker before selecting any of them – and they may be able to recommend which mortgage fits you right.