The Two Basic Types Of UK Mortgage

In the United Kingdom, when purchasing a home, buyers typically choose between two main types of mortgages: fixed-rate and adjustable-rate mortgages. While other options are available, these two are generally best suited to the needs of most people.

Fixed-Rate Mortgage

The fixed-rate mortgage is the most straightforward and traditional option for purchasing a home. Under this type of mortgage, the lender provides the borrower with the necessary funds to buy the home. The interest rate is set at the beginning and remains constant throughout the life of the mortgage, which is usually 15 or 30 years. The total interest over the term is calculated and added to the principal amount borrowed. The monthly repayments are then determined by dividing this total by the number of months in the mortgage term, ensuring that the monthly payment amount remains the same for the entire duration of the mortgage.

Adjustable-Rate Mortgage

The adjustable-rate mortgage (ARM) operates differently, as the interest rate on the loan changes in response to fluctuations in the country's market interest rates. Initially, ARMs often come with a "teaser" rate, which is slightly lower than the prevailing market rate. After the initial period, the interest rate adjusts to the current market rate. There is, however, a cap on how high the interest rate can rise, typically set at five percentage points above the teaser rate. For example, if the teaser rate is 4%, the cap would be 9%. It’s crucial for potential borrowers to consider the possibility of paying the capped interest rate for the remainder of the loan term. This scenario represents the worst-case situation, and it is advisable to calculate whether such a monthly repayment is affordable in case it becomes necessary in the future.