Which type of mortgage will suit you as interest rates hold again? (2024)

Which type of mortgage will suit you as interest rates hold again? (1)

Interest rates are still the highest they have been since February 2008

Matt Writtle

Ella Jessel1 February 2024

The UK base rate of interest is still holding at 5.25 per cent, the Bank of England has announced, giving mortgage holders not on a fixed rate another reprieve.

The Bank’s Monetary Policy Committee has voted to hold the rate again at it's first meeting of 2024.

It has now been held at 5.25 per cent for four months, following 14 consecutive rate hikes since 2021 in response to high inflation. Rates are still at the highest level since February 2008.

Inflation rose to four per cent in December 2023, according to the Office for National Statistics, up from 3.9 per cent in November.

Surges in mortgage rates over the past few months have been partly due to the economic turmoil sparked by the ‘mini-Budget’ policies announced in September 2022 by then-Prime Minister Liz Truss and former Chancellor Kwasi Kwarteng.

Mortgage lenders have begun to price their offerings more competitively in 2024, with some offering interest on certain mortgage loans as low as four per cent — although brokers have advised buyers to fix as soon as possible rather than wait for rates to fall further.

Today’s interest rates hold will mean mortgage repayments for households could remain stable, news that will be particularly welcome to homeowners with variable and tracker rate mortgages.

Mortgage holders with fixed rates of interest will remain protected for now, although the sting will eventually be felt when homeowners come off their lender’s fixed rate of interest, try to remortgage or move home.

Amid the ongoing economic turbulence, it can be hard to know what type of mortgage will suit your needs. Here are five ways you can borrow to buy a home.

Repayment mortgages

Most homeowners have repayment mortgages, and repay some of the capital amount borrowed, as well as some of the interest on the loan each month. Eventually they own their home outright when the loan is paid off. There are two types of repayment mortgage: fixed-term and variable.

With a fixed-rate mortgage, the interest rate is fixed for a set amount of time and won’t be affected by Bank of England base rate rises or fluctuations in the market. Typically, the fixed rate period (also known as the initial rate period) is the first two, three or five years of the term.

As the name suggests, variable rate mortgages have interest rates that can go up and down, meaning monthly payments can change. There are three main types: standard variable rate (SVR), tracker and discount-rate.

First-time buyer mortgages

For many first-time buyers, meeting deposit requirements is the biggest hurdle to realising the dream of home ownership.

This is where a 95 per cent mortgage can help, as with a home loan at 95 per cent loan-to-value (LTV), buyers need to raise a deposit of only five per cent.

The LTV is a ratio of a home loan relative to a property’s value. For example, a mortgage worth £190,000 on a £200,000 home has a 95 per cent LTV. Buyers then make up the five per cent difference with a deposit — in this case, £10,000.

During the uncertainty of the pandemic, banks became much more risk averse and many pulled their 95 per cent mortgage deals. But the product came back on the market after a government initiative was launched in 2021, providing a guarantee to mortgage lenders to encourage them to offer high loan-to-value (LTV) mortgages.

Major lenders including Barclays, HSBC, Lloyds, NatWest, Santander and Virgin Money offer 95 per cent mortgages under the Mortgage Guarantee Scheme. The closing date for the scheme has been extended to December 31 2023.

Zero-deposit mortgages

Renters who lack savings or financial support from their family can potentially make the jump on to the housing ladder with a new zero-deposit mortgage.

Skipton Building Society’s new “track record” mortgage could give a helping hand to people with a strong history of paying their rent but who have been only able to save a little or nothing for a deposit to buy their first home.

The deal is available for first-time buyers across Britain. Tenants aged 21 and over may be able to take out mortgages at between 95 per cent to 100 per cent of the value of the property they want to buy.

Skipton says it will not allow borrowers to pay more for their mortgage than they were handing over in rent. Applicants will also need to demonstrate at least a 12-month track record of paying their rent on time.

That should take care of concerns about affordability but does not eliminate the risk of negative equity.

Interest-only mortgages

Unlike the above repayment mortgages, interest-only mortgages require solely the interest to be paid for the term of the loan. They offer cheaper payments, but borrowers have to make sure they have a way of paying the full loan back at the end of the mortgage term.

They are not as common as they were before the credit crunch and have been the subject of mis-selling scandals in the past.

Since 2014, it has been more difficult to borrow on an interest-only basis. Not all lenders offer interest-only and those that do will have strict criteria such as a decent deposit and having an approved repayment vehicle in place.

According to UK Finance, new interest-only lending, while still permitted, accounts for only a small minority of activity. Just 32,000 interest-only loans were advanced in 2021 — less than three per cent of total lending.

‘Part and part’ mortgages

There is also a half way option between interest only and a traditional repayment mortgage. Called ‘part and part’ mortgages, these allow you to pay off some of your mortgage over time, but not all of it. When the mortgage term ends, there will still be some money left to pay off.

Experts stress that specific financial advice should be sought to ensure that there is a full understanding of the part and part arrangement, and any later financial considerations have been taken into account.

Lifetime or ‘reverse’ mortgages

Available to homeowners aged 55 and over, a lifetime mortgage, sometimes called a ‘reverse mortgage’, is a loan secured against your home that allows you to release tax-free cash without needing to move out. It’s a type of equity release, freeing up wealth tied up in an asset but allowing you to carry on living in the property.

Unlike conventional mortgages, where interest is charged on an amount that decreases with time, interest on lifetime mortgages is charged on an increasing sum, so your debt can grow quickly.

This is because you don’t usually make any repayments, so the interest on the loan is therefore added to your debt on a continual basis.

You can take the money as a lump sum or as a series of lump sums. No repayments are required until you die or move out of your home into long-term care.

What the experts say

Rachel Springall, finance expert at Money Facts, has this advice for buyers: “Considering the different terms of deals in the market and the rise in the cost of living, borrowers looking for peace of mind may want to consider fixing for longer, such as with a five-year fixed mortgage.

“Seeking independent financial advice is always a good idea not just to check the current deals but to also offer guidance when it comes to eligibility criteria and take away any anxiety of monitoring a direct application.”

“House prices have increased in many areas of the country, which can mean more equity in the home and more of a possibility for remortgage customers to get a cheaper mortgage.”

MORE ABOUT

Bank Of England

Mortgages

Interest Rates

Inflation

fixed rate mortgage

equity release

Which type of mortgage will suit you as interest rates hold again? (2024)

FAQs

Which type of mortgage should you choose if you want a stable interest rate? ›

Most borrowers choose fixed-rate mortgages. Your monthly payments are more likely to be stable with a fixed-rate loan, so you might prefer this option if you value certainty about your loan costs over the long term. With a fixed-rate loan, your interest rate and monthly principal and interest payment stay the same.

What type of mortgage adjusts the interest rate? ›

Adjustable-rate mortgages (ARMs), also known as variable-rate mortgages, have an interest rate that may change periodically depending on changes in a corresponding financial index that's associated with the loan. Generally speaking, your monthly payment will increase or decrease if the index rate goes up or down.

Which type of mortgage has a fixed interest rate? ›

Amortized fixed-rate mortgage loans are among the most common types of mortgages offered by lenders. These loans have fixed rates of interest over the life of the loan and steady installment payments. A fixed-rate amortizing mortgage loan requires a basis amortization schedule to be generated by the lender.

Is FHA better than conventional? ›

FHA loans generally come with looser requirements, so someone may decide to pursue this loan if they have less-than-perfect credit. Conventional loans have higher loan limits, so someone may choose this type of mortgage if they need to borrow more and have a stronger credit history.

Which type of mortgage typically offers low rates? ›

Adjustable-rate mortgages (ARMs) are a popular option for home buyers, as they typically offer lower interest rates during the introductory period than fixed-rate mortgages. Homeowners often hold onto their ARM until the end of the low-rate period and refinance into a fixed-rate mortgage to avoid the adjustable rate.

Which type of home loan is the most stable? ›

Fixed home loan interest rate is one where the rate does not fluctuate with changes in market forces. This rate remains steady throughout the tenor of the loan.

Which type of mortgage generally has a lower interest rate? ›

If you're after a lower interest rate, consider a shorter-term fixed-rate mortgage, like a 10- or 15-year loan. These loans often offer not only a better rate but also reduced costs than a 10/1 ARM.

What mortgage type has an interest rate adjusted every year? ›

Adjustable-Rate Mortgages. ARMs have a fixed period of time during which the initial interest rate remains constant. After that, the interest rate adjusts at specific regular intervals. The period after which the interest rate can change can vary significantly—from about one month to 10 years.

What is the most common adjustable-rate mortgage? ›

Let's look at an example: The most common adjustable-rate mortgage is a 5/1 ARM. This means you will have an initial period of five years (the “5”), during which the interest rate doesn't change. After that time, you can expect your ARM to adjust once a year (the “1”).

Which type of interest rate is best? ›

Why are Floating Interest Rates Better? Floating rates are usually slightly lower than fixed interest rates. Lenders charge more for fixed interest rates to cover their interest risk for the entire tenure.

What mortgage has a fixed interest rate? ›

A home loan with an interest rate that remains the same for the entire term of the loan.

What type of mortgage is interest only? ›

To put it simply, an interest-only mortgage is when you only pay interest the first several years of the loan — making your monthly payments lower when you first start making mortgage payments.

Why do people prefer FHA loans? ›

FHA loans are mortgages insured by the U.S. government's Federal Housing Administration. The insurance allows lenders to offer qualifying terms that are less strict than conventional mortgages. That means that homebuyers (particularly first-time buyers) can more easily qualify for a mortgage.

Is an FHA loan good? ›

Benefits of FHA loans

Lower minimum credit score requirements than conventional loans. Down payments as low as 3.5%. Debt-to-income ratios as high as 50% allowed (in some cases, may be higher if you meet compensating factors).

Why is conventional mortgage better? ›

Mortgage lenders can approve conventional loans without the typical delays incurred with FHA or government-backed loans. Also, with a conventional loan, sellers do not face an exhaustive FHA inspection, which sometimes then requires time-consuming repairs. Conventional loans come in all different types and sizes.

What type of mortgage loan has the lowest interest rate? ›

What type of home loan has the lowest interest rate? VA loans typically have the lowest interest rates. However, the VA program is only available to eligible service members and veterans. For non-VA buyers with strong credit, a conventional loan will typically offer the lowest rates.

Should I choose fixed-rate mortgage? ›

If you have a low loan-to-value (the size of your mortgage as a percentage of your property value) then you could benefit from fixing, as you will be able to secure a lower fixed-interest rate than someone with a higher loan-to-value. The longer your fixed term, the longer you are locked into an interest rate.

Is it better to have a variable or fixed mortgage? ›

If you value certainty, and plan on staying in your home for a while, the extra cost and risk of prepayment penalties associated with a fixed-rate mortgage could be worth it. If you don't mind the uncertainty, a variable-rate mortgage could save you money if rates drop in the middle of your mortgage term.

Should I do an ARM or fixed mortgage? ›

Is an ARM riskier than a fixed-rate mortgage? Yes. An ARM comes with a greater risk of a higher monthly payment if rates are higher in the future. That long-term risk, however, comes with the reward of a lower monthly payment during your intro period.

Top Articles
Can You Use Steam Points to Buy Games?
The Royal Mint Announce £17.7million Operating Profit as it forges new future in sustainable precious metals | The Royal Mint
Katie Pavlich Bikini Photos
Gamevault Agent
Hocus Pocus Showtimes Near Harkins Theatres Yuma Palms 14
Free Atm For Emerald Card Near Me
Craigslist Mexico Cancun
Hendersonville (Tennessee) – Travel guide at Wikivoyage
Doby's Funeral Home Obituaries
Vardis Olive Garden (Georgioupolis, Kreta) ✈️ inkl. Flug buchen
Select Truck Greensboro
Things To Do In Atlanta Tomorrow Night
How To Cut Eelgrass Grounded
Pac Man Deviantart
Alexander Funeral Home Gallatin Obituaries
Craigslist In Flagstaff
Shasta County Most Wanted 2022
Energy Healing Conference Utah
Testberichte zu E-Bikes & Fahrrädern von PROPHETE.
Aaa Saugus Ma Appointment
Geometry Review Quiz 5 Answer Key
Walgreens Alma School And Dynamite
Bible Gateway passage: Revelation 3 - New Living Translation
Yisd Home Access Center
Home
Shadbase Get Out Of Jail
Gina Wilson Angle Addition Postulate
Celina Powell Lil Meech Video: A Controversial Encounter Shakes Social Media - Video Reddit Trend
Walmart Pharmacy Near Me Open
Dmv In Anoka
A Christmas Horse - Alison Senxation
Ou Football Brainiacs
Access a Shared Resource | Computing for Arts + Sciences
Pixel Combat Unblocked
Cvs Sport Physicals
Mercedes W204 Belt Diagram
Rogold Extension
'Conan Exiles' 3.0 Guide: How To Unlock Spells And Sorcery
Teenbeautyfitness
Weekly Math Review Q4 3
Facebook Marketplace Marrero La
Nobodyhome.tv Reddit
Topos De Bolos Engraçados
Gregory (Five Nights at Freddy's)
Grand Valley State University Library Hours
Holzer Athena Portal
Hampton In And Suites Near Me
Stoughton Commuter Rail Schedule
Bedbathandbeyond Flemington Nj
Free Carnival-themed Google Slides & PowerPoint templates
Otter Bustr
Selly Medaline
Latest Posts
Article information

Author: Corie Satterfield

Last Updated:

Views: 6178

Rating: 4.1 / 5 (62 voted)

Reviews: 93% of readers found this page helpful

Author information

Name: Corie Satterfield

Birthday: 1992-08-19

Address: 850 Benjamin Bridge, Dickinsonchester, CO 68572-0542

Phone: +26813599986666

Job: Sales Manager

Hobby: Table tennis, Soapmaking, Flower arranging, amateur radio, Rock climbing, scrapbook, Horseback riding

Introduction: My name is Corie Satterfield, I am a fancy, perfect, spotless, quaint, fantastic, funny, lucky person who loves writing and wants to share my knowledge and understanding with you.