Last updated: 13/10/20
There are hundreds of mortgage deals to pick from, so finding the best mortgage for you can be challenging, time consuming and, if you get it wrong, incredibly costly.
When beginning your hunt for a mortgage, a good place to start is with internet research. Searching online can give you a starting point to identify mortgage types, and an idea of the rates available. After your initial internet research, an independent mortgage broker can then provide a more in-depth search for mortgage deals that are suitable for you. In this article we’ll break down the different types of mortgages available.
Mortgage types definition
So, what do we mean by “mortgage types?”. Mortgages are essentially large loans that enable you to purchase a property/land. There are lots of different types of mortgages in the UK that all work slightly differently. For example, some mortgages have fixed rates which means consistent monthly payments, whereas other mortgages have variable rates, which means your monthly payment could increase or decrease on a monthly basis.
Different types of mortgages
So, what types of mortgage loans are there and how do they work? Let’s find out.
Fixed rate mortgages
A fixed rate mortgage is where the mortgage interest rate is fixed for a specified period of time, which means that your monthly repayments will also be based on this fixed rate – this could be two, three or five years, although there are products that fix the rate for ten years, or even the entire mortgage term. This also means that the interest rate you are charged stays the same during the fixed rate period.
Benefits of a fixed rate mortgage
• Your monthly mortgage repayment stays the same during the fixed rate period, which means that you can budget for your monthly outgoings.
• You know when the fixed rate is set to end, so you can look for a new fixed rate deal with the same or another lender.
Fixed rate mortgage considerations
• If interest rates fall, your mortgage rate won’t change.
• If you want to increase your payments to pay back your mortgage more quickly, the maximum amount you can repay each year is usually restricted.
Variable rate mortgages
A variable rate mortgage is where the rate you are charged fluctuates in line with interest rates. This means that your monthly mortgage payments can go up or down in line with interest rate charged by your lender.
Benefits of variable rate mortgages
• If mortgage rates go down, your mortgage interest rate will follow suit.
• You may not be charged to move to a new mortgage deal or transfer your mortgage to another lender should your circumstances change.
You can make overpayments without penalty.
Variable rate considerations
• Whilst your interest rate may fall in line with current mortgage rates, your interest rate will also go up if your lender’s variable rate increases.
Repayment or Interest Only Mortgage
Whilst it is possible to set up a mortgage on an interest only basis, this type of mortgage is not suitable for the vast majority of first time buyers. The reason for this is that, with an interest only mortgage, you only ever repay interest to the mortgage lender, which means that at the end of the mortgage term you still owe the same amount you borrowed on day one.
A repayment mortgage is where the borrower repays both the capital amount and the accrued interest in fixed instalments over a fixed period. This is beneficial as it means that the borrowed amount decreases over the fixed term, and the entire amount can be paid off by the end of the fixed period.
Offset mortgages
An offset mortgage is where your mortgage and any savings you have are joint in the same account. Your savings act as temporary overpayments to your mortgage.
Benefits of offset mortgages
You’ll normally be able to lower your monthly payments. This is due to the value of your savings being deducted from the amount you pay interest on. You’ll also still have access to your savings should you need them!
Offset mortgage considerations
Unfortunately you won’t earn interest on your savings with an offset mortgage. Also, if you do withdraw money from your savings, this reduction will no longer offset your mortgage and it’s likely your monthly payments will increase.
Discounted variable rate mortgages
A discounted variable rate mortgage is where your interest rate is set at a fixed percentage below the standard variable rate (set by the Bank of England’s base rate), plus the lender’s additional costs.
For example, if the lender’s standard variable rate is 4.30% and the discounted rate is 1%, your interest rate would be 3.30% for the duration of your deal.
Benefits of discounted variable rate mortgages
• You’ll have a lower interest rate than the lender’s standard variable rate for as long as your deal lasts.
• You’ll probably have lower charges for early repayments compared to other mortgage deals which can help you save money in the long-run.
• You can end up paying even less if your lender’s standard variable rate lowers following the Bank of England’s base rate changing.
Discounted mortgage considerations
• Your monthly payments could still increase if your lender’s standard variable rate increases during the deal.
• Once your discounted period ends, you’ll be moved to the lender’s standard variable rate which will be more expensive. You can then look into taking out a new deal to help you pay less and save money.
Specialist mortgages
As well as the standard types of mortgages, there are also specialist mortgages available that support certain circumstances. For example, bad credit mortgages, guarantor mortgages, buy to let mortgages and so on.
What is the best type of mortgage loan?
Unfortunately there is no set answer here. What type of mortgage loan you need will be based on your exact needs as a borrower. Your mortgage advisor will always be the best person to talk you through your options and advise you on the best types of mortgage loans for you.
Don’t forget home insurance
Regardless of whether you’re an existing homeowner, tenant, or will soon be buying your first house, you’ll probably want to avoid unnecessary and unexpected costs related to your property and its contents. This is exactly what home insurance is for – to protect you against the unforeseeable.
Find out more about Howden’s range of home insurance policies today.