Since the economic decline, securing a mortgage in the UK has become increasingly difficult. But there's new hope, as the government have announced reforms on stamp duty meaning buyers could save thousands of pounds and making the prospect of securing a mortgage more realistic.
However, entering the mortgage world can be a confusing mass of financial terms, paperwork and credit scores. So in this article we'll offer advice, explain the main two types of mortgages in the UK and hope to put your mind at ease.
Fixed Rate Mortgages
In layman's terms, a fixed rate mortgage means the rate of interest has been frozen, so your monthly payments will remain the same. Therefore, this type of mortgage provides a form of financial security, making it a popular choice. Although this security can come with a price tag, as a fixed rate mortgage is often slightly higher than its variable counterpart.
The benefit here is that you're protected against inflation. Even if interest rates rise, your payments won't increase. On the other hand, if interest rates fall below the rate you're currently paying, you won't see any benefit.
A word of caution: think before you choose a fixed term mortgage as there are often hefty charges if you choose to leave early.
Variable Rate Mortgages
This type of mortgage is a more suitable option for those who want a little more flexibility. A variable rate mortgage comes in the form of: tracker, standard variable rate (SVR), offset and capped rate. The common attribute of these is that the interest rate is variable – i.e. your monthly mortgage repayments will be affected both by inflation or a decrease in interest rates. Therefore, a variable mortgage has its bonuses as well as its drawbacks. If you opt for this type of mortgage, make sure that either you have savings, or your income allows for an increase in payments.
The main advantage with a variable rate is that as a general rule, they offer more freedom. For example, with an SVR or an offset mortgage, there is no fee for overpayment meaning you have the option of paying off your mortgage early.
Ultimately, the type of mortgage you get will be dictated by your personal situation and circumstances (including factors such as being self-employed, your credit history and your age). Speak to your mortgage advisor who will be able to tell you which mortgage is suitable.