The mortgage market in the UK is probably the most important and largest financial market of all. After all, there are 11.1 million mortgages in the UK. The UK mortgage market is worth more than £1.3 trillion. The UK is the largest in Europe in terms of amount lent and total value of outstanding loans. Over £245 billion was borrowed in 2016 for mortgages alone. Moolr took a brief look at what types of mortgages are available for prospective house owners.
Fixed rate mortgage
With a fixed rate mortgage, the interest rate remains the same throughout the period of the deal. Typically the period of the deal is one to five years, though it is possible to get ten year fixed rates. If you opt for a fixed-rate, you’ll have the security of knowing exactly how much your mortgage will cost you for a set period of time.
Your mortgage payments will remain the same, even if interest rates changed. The mortgage gives you security, and allows you to budget accordingly.
As mentioned above, with a fixed rate mortgage you are tied in for the length of the deal. So if interest rates were to fall you cannot take advantage of them. If interest changes make you want to change your deal you will not be able to easily. If you want to get out of the mortgage before the end of the deal, you’ll be charged a hefty penalty. The penalty imposed can often be thousands of pounds.
So before you apply for a fixed rate mortgage, think about how long you are happy to be locked in for. If this type of mortgage is right for you, consider shorter periods.
This type of mortgage is different to a fixed rate one as the interest rates you pay are linked to the market and the economy. Thus they can fluctuate. There is less stability with this type of mortgage. In simple terms, if the base interest rate set by the Bank of England changes, your mortgage rate will also change.
So a mortgage lender will agree a rate with you linked to the base rate set by the BOE. To give an example, if the base rate was 0.50%, and you took a tracker mortgage with a rate that is 1% above the base rate you pay an interest rate of 1.50% . If the Bank of England put the base rate up to 1%, your mortgage rate would increase to 2.00%. As a result, your monthly payments would increase. But should the base rate decrease, the monthly payments would also go down. Like fixed rate mortgages, trackers are available over different terms: most commonly two or five years. Lifetime tracker mortgages are also available too.
The rates on the leading tracker mortgages tend to be lower than on fixed rate deals. Although trackers are variable they are easy to understand. Simply knowing the base rate at any time informs you of your interest rate. For much of the mortgage period, the rate will be steady, as the Bank of England does not tend to change the interest rate that regularly.
You don’t have the same security with a tracker that you get with a fixed mortgage because the rate is variable. you must prepare with this type of mortgage for the possibility of your monthly repayments going up as well as down. Thus, you should be comfortable with budgeting for such a possibility.
Trackers are not the only type of variable mortgage. Discounts are another type. The difference is that with discount mortgages, the interest rate isn’t linked to the Bank of England base rate. Instead, it’s linked to the lender’s standard variable rate (SVR). This is a significant difference because lenders can change their SVR. They can do this even if there has been no change in the base rate.
Discount mortgages are available over different terms, often ranging from one to five years. As with trackers and fixed rate deals you will probably be charged a penalty if you want to get out of the deal during the term.