Taking out a mortgage is probably the biggest financial undertaking you will ever make. Naturally, you will want to know which mortgages are the best ones. Happily, there is plenty of choice in the UK mortgage market, but with 1,000+ deals on offer, identifying which mortgage is best for you can be difficult.

Around 70% of borrowers consult a financial adviser or mortgage broker who can quickly scour the market and find out which mortgage is the most appropriate, given your financial circumstances, plans, attitude to risk and other preferences. 

Others arrange their mortgages via a lender’s branch, over the phone or on the internet.

Whether you are a first-time buyer, looking to remortgage or a home mover, this website provides a wealth of information on the different mortgage types available, so it’s a good place to start to learn about mortgages.

Mortgage Types
The most popular mortgage types in the UK tend to be fixed rates and discounted mortgages, and we take you through the pros and cons of these and the other mortgages on the market.

It is also important for you to understand the difference between repayment (or capital and interest) mortgages, and what mortgage type is best for you.

Regardless of what mortgage needs you have, it is important to establish upfront what mortgage type you are after, and whether you want to take it out on a repayment or an interest-only basis, as this will narrow down your search considerably. Even if you are planning to consult an adviser, it makes sense to understand the basics and have some idea of what mortgage type you want, before you meet with them.

With a variable rate mortgage, the interest rate you pay can vary, moving up and down over time.

Every mortgage lender has a Standard Variable Rate (SVR) that is loosely based on the Bank Rate; the benchmark interest rate set by the Bank of England.

Each lender sets its own SVR, usually 1% to 2% above the Bank Rate. So where the Bank rate is 5.25%, a lender’s standard variable rate may be 6.25%, 7.25% - or higher in some cases.

Fixed rate mortgages are very popular in the UK. As the name suggests, they allow you to fix the rate of interest you will pay on your mortgage for an agreed period. Most UK mortgage lenders offer a range of fixed rate mortgages. The most popular fixed rate mortgages are 2 year, 3 year and 5 year deals, but it is possible to get a fixed rate mortgage for anything from 6 months to 25 years.

As a rule, the longer you fix your rate for, the higher the interest rate you can expect to pay. However, as this market is so competitive, 2, 3 and 5 year deals are sometimes available at very similar interest rates.

A capped rate mortgage is very similar to a fixed rate mortgage, in that there is a maximum interest rate set for a given period of time, and the rate you pay is guaranteed not to go above that rate for the agreed period.

However, with a capped rate mortgage, should the Bank Rate fall during that period the rate you pay for your mortgage will ‘track’ the interest rate downwards, reducing your mortgage repayments.

A tracker mortgage is similar to a discount, but arguably more transparent. With a discount, a mortgage lender offers you a set percentage off their own Standard Variable Rate (SVR). While a tracker mortgage follows the Bank Rate set by the Bank of England charged at a defined margin.

So if the Bank of England sets the Bank rate at 6%, you might get a tracker mortgage at Bank Rate +1% = 7%.

A discount mortgage offers you a discount off the lender’s Standard Variable Rate (SVR). As a rule, the shorter the length of the discount mortgage, the bigger the discount. So you might get a variable rate mortgage with a 2% discount for 6 months, or a 0.5% discount mortgage for two years, for example.

Discount mortgages can offer some of the lowest interest rates available in the market. But note that they are attached to the lender’s SVR, and as such will go up and down as interest rates fluctuate, so your repayments will vary.
With an interest-only mortgage, the payment you make to the mortgage lender each month comprises just the interest you owe them for that month. So you are not paying off any of the capital you owe.

When you take out an interest-only mortgage, you are supposed to also make a monthly payment into an Individual Savings Account, endowment or other investment. The hope is that the investment will then generate sufficient returns to pay off the capital sum you still owe at the end of the mortgage term.

However, there is no guarantee of this, so any interest-only mortgage carries an element of risk.

In recent years, increasing numbers of first-time buyers have taken out interest-only mortgages, and have just paid the interest, not paying any money into an investment. With high house prices, this is the only way some people have managed to afford to buy property. When taking out an interest-only mortgage and just paying the interest, they are relying on their property going up in value, being able to sell it a few years down the line for a profit, and then buying a property with a repayment-type mortgage.

There are a number of risks here. Firstly, house prices are not guaranteed to go up, and could even fall. Secondly, many people sort out their mortgage and then forget about it. If you never get around to converting your interest-only mortgage to a repayment-type, and you have no investment fund building up, there is a very real risk that you may get to the end of your 25 year mortgage term still owing all of the capital initially borrowed and with no way of repaying it.

With a repayment-type mortgage, the monthly repayment you make to the lender each month consists of the interest you owe plus a little bit of the capital you owe. If you keep up all the repayments on your mortgage, you are guaranteed to have paid off the mortgage at the end of the term. Repayment-type mortgages are therefore the safest option, and are by far the most popular mortgage type in the UK.

Buy-to-let investors are the only borrowers who are advised to take out interest-only mortgages with no investment vehicle. That is because the rent covers your interest payments, and the long term plan is generally to sell the property in the future, and pay off the capital at that point.

Frequently Asked Questions

How much could I borrow on a mortgage?
How much will it cost me to move?
Which rate is best for me fixed or discount?
How do I repay my mortgage interest only or repayment?
What is a self cert mortgage?
What is a secured loan?
How do I protect my mortgage?
What should I look out for when remortgaging? 
Mortgage Calculator?
What happening in the mortgage industry?
What happens if I have late payments on my mortgage?
Apply for a mortgage?
Ask us a question?
How much deposit do I need if I am buying to let? 

Mortgage Advice Rayleigh - Mortgage Advice Basildon - Mortgage Advice Southend - Mortgage Advice Grays - Mortgage advice Benfleet - Mortgage advice Westcliff - Debt Advice in Basildon