There are two main mortgage types available: those with a fixed interest rate (for which you pay the same rate every month) and those with a variable interest rate (where the rate will rise or fall contingent upon the economic environment). This article discusses the ins and outs of getting a mortgage in the UK.

Mortgages with a fixed rate

The vast majority of mortgages in the UK, both for first-time buyers and current homeowners refinancing, are fixed-rate loans. Many people prefer this type of mortgage because it provides certainty and allows them to better budget their monthly expenses.

Fixed-rate mortgages are useful because they mean your monthly payments will stay the same no matter what happens to the base interest rate set by the Bank of England (BoE). In recent months, the BoE has raised the base rate several times and likely will again in the near future, making fixed-rate mortgages even more attractive as an option.

Although mortgages with fixed rates for 3, 7, 10, and even 15 years are available, the most popular loan lengths are 2 and 5 years.

You will have to remortgage after your fixed-rate period ends. If you don’t, your interest rate will go to the lender’s SVR, which is almost always substantially higher. Don’t wait until your mortgage term has ended or is close to ending, speak with your lender, and indeed, other lenders, at least six months in advance to give you time to find a suitable option.

Tracker mortgages

The interest rate on a tracker mortgage is a variable that is pegged to the Bank of England base rate in addition to a set percentage.

With a base interest rate, for instance, of 3.5 percent. Your rate would be 5.5% if your tracker was “base rate plus 2%.”

Increases in the base rate will result in higher loan payments. Generally speaking, if it decreases, your monthly payment will decrease as well. However, the decrease does not always mean you will pay less, other factors also come into play.

This is due to the fact that the interest rate on some tracker mortgages is capped at a predetermined ‘collar’ level. This implies that even if the base rate drops, it’s possible that your payments won’t decrease proportionately.

Mortgage trackers, similar to conventional fixed-rate loans, feature an introductory discount period (most commonly two years). If you don’t remortgage before this period ends, your loan will be converted to the lender’s standard variable rate.

Discount mortgages

This type of mortgage is a variable-rate option that will charge the lender’s SVR minus a fixed margin.

This means that if your lender’s SVR is 5%, and your contract charges the SVR less 2%, your effective rate will be 3%.

Your payments will increase if the lender raises its SVR in response to market conditions (such as an increase in the base rate). You’ll save money if the SVR falls.

The standard introductory period for discount mortgages is two years.

Standard variable rate mortgages

An SVR is something that may be determined by the individual lending institution at the level they see fit. Most of the time, a SVR has a much higher interest rate than a fixed mortgage, a tracker mortgage, or a discount mortgage.

SVRs are seldom adjusted but remain constant. Despite the fact that they are not specifically related to the base rate, it frequently affects them.

If the BoE base rate increases by 0.25 percentage points, for instance, lenders are not obligated to increase their SVR by the same amount, though many do as a result.

The advantages and disadvantages of these mortgage types 

Fixed-rate mortgages

Advantages of fixed-rate mortgages:

• Your interest rate will stay at the introductory rate for the whole length of the contract, no matter how the market changes.
• If you want the security of a regular monthly payment, this is a good option to consider.

Disadvantages of fixed-rate mortgages:

• Your monthly payment might be higher than it would be with a variable-rate mortgage if interest rates dropped.

Tracker mortgages

Advantages of tracker mortgages:

• If the base interest rate drops, so will your monthly payment (unless your deal has a collar set at the current rate).
• The sole variable in your interest rate is the Bank of England base rate, not your lender’s SVR.

Disadvantages of tracker mortgages:

• During the term of the mortgage arrangement, you won’t be able to predict with any degree of accuracy how much you’ll have to pay each month.
• Not all mortgages will allow you to profit from a decrease in the base rate.

Discount mortgages

Advantages of discount mortgages:

• For the term of the agreement, your rate will be lower than your lender’s SVR.
• If your lender’s SVR is low, you could benefit from an excellent interest rate.

Disadvantages of discount mortgages:

• Whenever your lender decides to change their SVR, your monthly payments could go up, which could cost you a lot more.

What would be the best mortgage for me?

The following three main considerations should help you decide between a fixed-rate and a variable-rate mortgage:

• To what extent do you anticipate a change in your income?
• You’d rather know how much money you’ll be paying each month up front.
• You’d be able to handle it if the payments were higher each month.

Interest-only and repayment mortgages

There are two main mortgage structures: interest-only and repayment.

For an interest-only mortgage, monthly payments are limited to the interest accrued, so the principal isn’t paid until the loan’s expiration date.

Most mortgages are repayment mortgages, where each monthly payment goes toward both the principal and the interest.

Joint mortgages

Unless buying with a cash purchase where no mortgage is needed, joint mortgages are obtained when one person (usually a couple but sometimes friends or family members) purchases real estate jointly and therefore takes out a joint mortgage.

Both people will be named in the mortgage agreement and the property deeds, making them both responsible for making monthly mortgage payments.

What will your borrowing options be?

A major advantage of joint mortgages is that you will likely be able to significantly increase the amount you could borrow.

The standard loan-to-income ratio allowed by most lenders is 4.5 times annual income. If you’re a single buyer with a yearly income of £30,000, you may be eligible for a loan of up to £135,000. However, that sum increases to £270,000 if your spouse also brings in £30,000 annually. As you can clearly see, the difference is quite substantial.

If you pool your resources, you may be able to make a bigger down payment and qualify for a more favourable mortgage rate. The bigger the deposit you can pay, the better deal you will likely be able to strike with a lender.

Credit score with joint mortgages

Each potential borrower’s credit will be checked before a mortgage is approved. This is important to note because a lender’s judgement may be swayed if one of the parties has a low credit rating.

When taking out a mortgage with someone, it’s important to keep in mind the monetary ties that will be formed between you and the other person. Therefore, give careful thought before jumping into a joint mortgage, and be sure you know the person very well and their financial background.

One more word of caution to keep in mind if you are considering a joint mortgage: if one of you misses a mortgage payment, it will negatively affect both of your credit scores.

How to divide a joint mortgage if you want to end it

There are a few ways out of a combined mortgage, regardless of the reason you want out.

• Sell the property. You can pay off your mortgage by selling your property and using the money to do so; however, an early repayment penalty may apply if you are still in the mortgage’s introductory term. You will need to check with your lender to see if there will be any financial penalties for ending the loan early.
• A transfer of equity. Equity transfer refers to the legal procedure through which one person acquires sole ownership of a property that was previously held jointly. One shareholder may “buy out” another shareholder.
• Continue with the mortgage. In some cases, such as when a couple divorces but one spouse continues to live in the home with the children, the parties to the divorce agree to continue making mortgage payments until the debt is paid in full.