UK banks and Building Societies have a range of various options on mortgages which can be very confusing to house buyers who are unused to dealing with large financial contracts. Hopefully, this article will help to clear up some of the complexity.

Firstly, let me explain what a mortgage is. Essentially, it is a large loan from a bank, or other financial institution, to enable a person to buy a house. It will be repaid over a long term, the average being 25 years, and will attract interest just like the personal loan taken out for your car or holiday. A mortgage differs slightly from a personal loan in that the house is taken as security, which means that if the homeowner gets severely behind in their repayments, and cannot afford to continue paying the mortgage, then the bank can sell the house to recoup their lending.

The different types of mortgage available to prospective buyers come in seven basic categories. A lot of the mortgages on the market will be a variation on these types, or a mixture of several, but understanding the core types will help when deciding on a mortgage.

All banks will have an underlying rate, known as the standard variable rate, which the mortgage rates are based on but the majority of mortgages will rarely be at this rate.

The Discount mortgage is exactly what it says. There will be a percentage discount from the standard variable rate of the financial institution for a set number of years. This could be 2% discount for the first 2 years, for instance. Which will mean your repayments will benefit from a lower interest rate for the first two years and then go up to the standard variable rate, although, in practice, your lender will often have another package available at this time that they may offer you. When first time buyer or key worker deals are offered these are often discount mortgages.

The Capped mortgage seems to have gone a little out of fashion in today's market but may become more popular again once rates start to rise. This mortgage caps the rate at a certain figure for a period of time. So, if the rates rise rapidly, your interest rate will be guaranteed not to exceed this figure while the capping period lasts. An example of this would be if your interest rate is capped at 5.4%, for instance, and the rates rise to 8.0% then the rate you pay will stay at 5.4% until the end of the capped period. The capped term will be made clear when the mortgage is arranged.

The Fixed Rate mortgage is

• 1
• 2
• 3
• next page >>

---

Add your voice

Know something about Understanding the different types of UK mortgages?
We want to hear your view. Write now!