Top 4 Mortgage Types in UK

The UK mortgage market has a variety of loan programs for consumers to choose from. Each option comes along with distinct features and benefits which one needs to understand in order to select the right offer. Out of all options available, the 4 widely popular options are listed below:

Variable rate mortgage or ARM:
Variable rate mortgages are loans in which the interest rates vary from time to time. Lenders offering variable rate loans or ARMs (as these are known in US) fix the mortgage rate at 1%-2% above the Standard Variable Rate (SVR) which is based on the benchmark interest rate set by the Bank of England.

Fixed rate loans:
Fixed rate mortgages are those in which the interest rate is fixed for a certain period of time, say 2, 3 or 5 years after which the lender may convert the rate into a Standard Variable Rate for the remaining loan term. The Standard Variable Rate can be higher than the fixed rate you were offered initially. Fixed rate mortgages are available both as an interest-only or repayment loans.

Capped rate mortgage:
Capped rate loans have features of fixed and variable rate mortgages or Adjustable Rate Mortgage. The lender charges an interest rate pretty close to the prevailing rates and offers the guarantee that rate won’t go beyond a certain limit. The best thing about such loans is that the borrower’s mortgage rate can fall but there’s a limit beyond which it will never be raised, no matter how much the prevailing rates go up.

Discount rate mortgage:
Discount rate loans are those in which you get a discount off the Standard Variable Rate. The discounted rate is usually set at few percentage points below the Standard Variable Rate. In case of a Stepped discount mortgage, one gets a rate discount, say 2% in the first year, and 1% in the second year.

The best way to select from any of the above programs is to collect information on how these loans work and what you need to pay. Then compare the offers and take the right decision keeping in mind your affordability.