If you are looking to get a house then you will require a mortgage loan. There are many types of mortgage loans which are each fit for a particular group of people. You need to gain the information about each type in order to identify the right mortgage option which fulfils your loan needs with perfection.
Here, we present the most common mortgage types that are available in the UK and often selected by people. especially for buying their first property.
Fixed Rate Mortgage
The most common type of mortgage is the fixed rate mortgage. The lender charges you a fixed interest rate for the whole duration of the mortgage. This rate is often subject to the standard interest rate in the country as well as the period of mortgage. It increases with the increase in period of mortgage. It cannot vary during the period of payment, but late fees and other penalties may be added in case of failure to pay monthly instalments.
The disadvantage with this mortgage is that you cannot enjoy the benefits of a lower interest rate if economic conditions change in the future. On the other hand, you are also protected if there is a negative effect in the economy causing an increase in the variable interest rate. There is also a penalty if you want to opt for an early repayment.
Tracker/Variable Rate Mortgage
This mortgage is formulated on the base rate of interest which is set by the bank of England in the UK. Most tracker mortgages are at 2% above the base rate. This rate changes each time there is a change in the standard interest rate in the country. Tracker mortgage rates are often lower than fixed rates but you are at a risk if the economic conditions change.
Tracker mortgage also has some penalties for paying off the loan, but there are many tracker mortgages which only charge a small fee to pay off the complete loan amount. They are riskier than their fixed rate counterpart.
This is a special mortgage which employs your savings. It allows you to pay interest from your current amount of loan. You can place additional money in your savings account which is taken as the principal amount of loan that you are returning. This means that your additional savings are used to constantly decrease the remaining mortgage thereby reducing the interest with each month.
This type of mortgage is suitable for the bank as well as the debtor is responsible to pay it completely after the designated period of either five or ten years.
Which is Better?
This depends on your financial circumstances and your preferences. A person who has a stable income and wants to pay off the loan in a long time needs to select a fixed rate mortgage. A person who is sure to pay the mortgage in just two to three years can ideally select the variable rate mortgage option. For a person who is running his own business and doing well, the offset mortgage is a great option as he can greatly reduce the loan amount whenever he earns a big amount.