Choosing the mortgage that’s right for you can be a complicated task with so many types of mortgage loan available. Before contacting a broker, or one of our solicitors regarding conveyancing, a little goes a long way in terms of researching your possibilities.
Below, we’ve summarised the different mortgage loans you might encounter when setting up your own.
Fixed Rate Mortgage
Fixed rate interest for periods of 2 to 10 years, after which the interest rate typically changes to the lender’s standard variable rate. This type of mortgage is the most popular in the UK, at approximately 75% of all mortgages.
After the initial fixed rate period, many people tend to change their mortgage to a new fixed rate contract, rather than reverting to the standard variable rate long term.
Variable Rate Mortgage
Under a variable rate mortgage, the interest you pay each month may fluctuate as they’re dependent on the general interest rate. However, the lender can also change the rate at will, as well. These rates are known as standard variable rates (SVR), but there are two other kinds of variable rate which we have outlined below:
Discount Mortgage
Discounted mortgages are an SVR with a fixed, discounted amount which will usually be for 2 to 3 years. The discount only applies to the interest charged by your lender, however – not the money you’ve borrowed. If the SVR goes up, so will your payments. If it goes down, you’ll pay less. Whether or not a discount mortgage is right for you really comes down to your attitude around risk.
Tracker Mortgage
With a tracker mortgage, you will pay a set percentage as well as the variable Bank of England base rate. Currently (September 2022), the base rate is 1.75%. If your tracker rate is, for example, base rate plus 2%, your full rate will be 3.75%.
If the base rate fluctuates, your monthly repayments should change accordingly. However, some tracker mortgages come with a collar, meaning the rate can only go so low.
Offset Mortgage
Offset mortgages are linked to savings accounts to lower the interest you’ll be charged monthly, so you’ll only pay interest on your mortgage minus the amount in your savings account. For example, if your mortgage is £250,000, and you have a savings account that contains £30,000, you will only pay interest on £220,000 of the mortgage, rather than the full amount.
You should still be able to add or remove money from your savings account while it’s tied to an offset mortgage. However, it’s worth considering that your savings account won’t earn any interest if it’s being used for an offset mortgage.
Interest-Only Mortgage
In an interest-only mortgage, your monthly payment only has to be the interest charged each month for the term of your loan. At the end of the loan, however, you will still owe the full amount that you originally borrowed.
Your mortgage lender will need proof of an approved repayment plan, if you’re seeking an interest-only mortgage. They’re also likely to check in regularly to ensure you’re still on track to repay the full amount by the end of the term.
Conveyancing with Howells
Once you have chosen the right option for you and got a mortgage in principle, you are free to start putting offers in on properties. For expert, personalised advice on conveyancing for a new property once an offer has been accepted, get in touch with one of our residential conveyancing solicitors.
