The Two Basic Types Of UK Mortgage

Posted by Nick Niesen on October 29th, 2010

In the United Kingdom there are two main mortgages that people choose between when purchasing their home. Other options are available but for the large majority of people, it is one of either the fixed-rate mortgage or the adjustable-rate mortgage which is best suited to their requirements.

The fixed-rate mortgage is the most simple of mortgages and the one which most people see as the traditional way to purchase your home. This involves the mortgage provider lending you the money you need to buy your home and, using their interest rate, calculating how much interest the loan will accrue over the period for which the mortgage has been borrowed. This is usually either 15 or 30 years. The sum of the interest is added on to the amount being borrowed and the monthly repayments are simply the result of this total divided by the number of months over which the mortgage will be repaid. This ensures that the monthly amount stays the same for the life of the mortgage.

The adjustable-rate mortgage is slightly different. The interest to be paid on the amount of the loan that you borrow changes dependent on interest rate changes in the country. The first year of the mortgage is usually offered with a teaser rate of interest. This is generally slightly lower than the market interest rate. After this point the interest reverts to the standard level for that time. However, you do have a cap at which point the interest will not get any higher. This is usually five points higher than your teaser interest rate so if your teaser was 4% your cap would be 9%. The important thing to consider if you are thinking about opting for the adjustable-rate mortgage is that you may have to pay the capped level of interest for the life of the loan. That is the worst case scenario but it is certainly worth calculating whether you could afford this level of monthly repayment just in case you may have to in the future.