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UK Mortgage Types

Types of UK Residential Mortgage Online

Getting a cheap, low interest rate mortgage online in the UK means you are suddenly surrounded by jargon. Use this guide to untangle the terms and steer your way to a really good, low rate mortgage.

Fixed rate mortgages

Fixed rate mortgages guarantee a specific rate of interest for a set length of time. Most commonly, this is for between one and five years, though it can be as long as ten or even fifteen years. As a rule, the longer the fixed period, the higher the starting rate of interest. A lender will not want to commit to lending you money at a really low interest rate for ten years when there is a fair chance that during that period the general level of interest rates may rise above the rate at which they are lending your mortgage. Low interest rates are often found with deals that are fixed for two to three years.

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Capped rate mortgage

As with all variable rate mortgages, the rate follows the lender's SVR up and down. The difference with this type of mortgage is that the rate is guaranteed not to go above the level at which it is 'capped'. This type of mortgage is cheap in times of steadily rising interest rates.

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Discounted mortgages

With a discounted rate mortgage, the Standard Variable Rate is temporarily reduced by a set amount for a specified period. This usually ranges from one to five years. Once the discounted period is over, you then revert to paying the prevailing Standard Variable Rate. With this type of mortgage, it is the discount that is fixed and not the actual rate.

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Variable rate mortgages

As you would expect from the name, variable mortgage rates go up and down and generally don't stay at the same level for too long. This is because the interest rate and subsequent level of repayment varies with the lender's interest rate. In the UK this is usually derived from the Bank of England base rate. On the continent the index is often derived from the prime bank base rate - an average of the rates of several leading lenders.

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Tracker mortgages

Tracker mortgages in the UK are usually linked to the Bank of England base rate, in that you pay a set margin above the current base rate level. Unlike many of the other types of rate, most tracker rates will not revert to the SVR at any point during the life of the loan. They will continue to track the base rate until you have either paid off your mortgage or switch provider or product. You can also get tracker mortgages that have discounts and stepped discounts built into them.

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