A loan that is secured by property or real estate is called a mortgage. In exchange for the funds that the borrower receives to buy property or a home, the lender gets the promise of the borrower to repay the funds during a specified amount of time at a certain cost. The mortgage is a document that legally secures the note and gives the lender a legal claim against the borrower’s house if the borrower defaults on the note’s terms. Basically, the borrower has possession of the property or home, but the lender is the one who actually has ownership until the loan is completely paid off.
There are several options that are available when obtaining a mortgage in the U.K., which involves research to determine the best fit for the borrower’s financial situation.
Types of Mortgages in the U.K.
The United Kingdom has several different types of mortgage programs available for borrowers. Basic information regarding these loan programs include:
- Standard Variable Rate is the standard rate of interest used by lenders. It is linked to the base rate of the Bank of England, so whenever the base rate goes up, so do the mortgage rates & monthly payments. However, these mortgages aren’t directly set at the base rate, but they are usually set at around 1-2% higher. This fact makes this type of mortgage expensive, so not many voluntarily choose this type of adjustable mortgage, but it is the rate borrowers are switched to once their initial offer period expires.
- A fixed mortgage rate has a fixed interest rate. This means that the mortgage payments will remain exactly the same each month until the initial deal expires. This option is excellent for those with a tight budget, which makes it very important for the borrower to know how much they will be spending since this options is popular amongst first time buyers. When the borrower knows there are no surprises, knowing that makes it worth choosing a mortgage with a fixed rate, especially during periods of interest rate volatility. If the borrower believes rates will rise, fixing the mortgage rate could save money. However, this also works the other way around meaning that the borrower could end up paying more than everyone around them if mortgage rates plummet.
- Buy-to-let mortgages are not used very often, but most lenders do offer a number of buy-to-let mortgages and the existence of these mortgages has grown to 700,000 within the past 5 years. Things to consider: Whether or not to end the mortgage term with the property full paid for or not. If no arrangements have been made to pay off the mortgage capital, then the borrower may have to sell the property in order to pay it off. It is also dependent on what is desired from the rental income throughout the term of the mortgage. If the borrower needs some of the rent to live on, then an interest-only mortgage would probably be the best bet because after making interest payments, there is rent left over for the borrower to place within their pocket
- Offset mortgages are a relatively new mortgage to the U.K. They work my taking advantage of the borrower’s tendency to get less interest in savings than what is paid for on debts. Basically, the borrower has a savings account that is linked to the mortgage, but instead of interest being earned on the savings, the money is used to reduce the mortgage balance. These mortgages are a good option for anyone with a large amount of cash put away. They can also be good for people who are self-employed or receive high yearly bonuses. By putting money into an offset savings, the borrower can benefit from their cash because it works against the debt of their mortgage.
- Discounted rate mortgages do exactly what they say. They discount the lender’s Standard Variable Rate Mortgage. For example: A lender may offer a 2% discount on its standard variable rate mortgage for two years. With a standard variable rate of 6%, this would make the mortgage rate 4%. Since discounted rates are linked to SVR, they are variable, so that means if the base rate falls, the mortgage will also fall. This means a decrease in the amount of mortgage payments each month. However, rates can rise and so do the mortgage rates. Lenders may implement an SVR rise frequently and let many months pass before allowing a cut, which means the borrower will not benefit immediately.
- Capped Rate Mortgages are great for those who like the possibility of a discount rate, but don’t want payments to vary too much. These mortgages are still linked to the SVR of the lender, but the interest rate is “capped” for a certain term. That means if interest rates rise above the capped level, the borrower will benefit. If the interest rates fall, so will the mortgage rate. This resembles being able to get security from a fixed rate mortgage.