Managing my financial journey
Managing my financial journey

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Managing my financial journey

3.1.3 The mortgage market – rock-bottom rates

Buying a property, particularly your first property, usually involves taking out a mortgage – a loan secured against the home.

To guide you through what can seem like a maze of mortgages, here’s personal finance expert Jonquil Lowe to explain the six most common types. At the time of writing the rates on mortgage products are, like other forms of borrowing, at historically low rates. The availability of such cheap finance is one reason why house prices have seen such strong growth since 2010.

  • Fixed-rate mortgage
  • Variable-rate mortgage
  • Capped-rate mortgage
  • Offset mortgage
  • Flexible mortgage
  • Shared-ownership mortgage
Download this video clip.Video player: ou_futurelearn_managing_my_journey_vid_1070.mp4
Skip transcript


If your budget will be a bit tight at first, one option is to look at a fixed rate mortgage. The interest rate is 'fixed' for the first two, three, even five years. The advantage of that is you know exactly what you'll be paying each month for the mortgage. You're protected from any interest rate rise. Some countries have mortgages fixed for long periods like 10 or 25 years, but although there are a few like that here in the UK, they've never really caught on.
Remember, you'd be locked into the same rate year after year. If other interest rates fall, you'd be paying over the odds, so a fixed rate that seems like a good deal at the start can become uncompetitive. Fixed rate mortgages usually have early redemption penalties. These are fees, payable for repaying the mortgage early.
So you would need to weigh up what you'd lose in charges against what you would gain by switching. And you do have to repay the mortgage and then take out another, so it may mean negotiating all over again, even if you stay with the same Bank or Building Society.
The opposite of a fixed rate is a variable rate mortgage, where the interest rate - and so your monthly payments - can go up and down. But, again if you're worried about your budget in the early years, you could go for a discounted rate mortgage. In other countries they sometimes call this the 'low start' mortgage. Your interest rate and repayments start at a special low rate. The interest rate then goes up to the lender's full rate - called its 'standard variable rate' - so you need to make sure you will be able to afford the increased payments. You could look around then to see if you can switch to another low-cost deal.
But discounted rate mortgages usually have early repayment charges that extend beyond the discount period, so - once again - you'd have to weigh those up against the gain from switching. You could opt for a 'capped rate' mortgage. That's a mortgage where the interest rate is variable, but can't exceed a maximum level and so you know your monthly repayments will never go above a certain amount. Like the other special mortgage deals, these are also likely to have early redemption penalties. An alternative product is a collared rate mortgage where there is both a cap on how high the rate can go and a floor below which the mortgage rate cannot fall. These, though, are uncommon in the UK mortgage market.
Offset mortgages are interesting. If you have surplus cash - say in your current account or your savings account - you can move that to the mortgage lender and it's deducted from the amount you owe on your mortgage before the monthly mortgage interest is worked out. So if the interest rate received on the savings account is lower than that charged on the mortgage - which typically it is - this can be a good deal. In effect, your savings are earning interest at the mortgage rate. Usually, you can still draw your savings out - for example for a holiday or life's uncertainties - then of course, the interest charged on the mortgage goes up.
The interest rate on an offset mortgage is usually a bit higher than other lenders would charge. Whether it's a good deal really depends on the amount of savings you can offset. You might want to consider a flexible mortgage. A variable rate mortgage where you can choose to vary your monthly payments and sometimes borrow back money you've already paid off. Obviously being able to reduce your payments could be useful if you're going through a tough time financially. But flexibility is good the other way too.
Most mortgages these days let you pay off extra if you want to. That means you pay off your mortgage faster and pay less interest in total. However some people worry that, with the freedom to reduce payments in bad times, they won't push their payments back up enough in the good times. Like when you're on holiday, you don't want to go back to work. With a fixed or variable rate mortgage, you pay whatever the lender tells you to pay each month - and that inflexibility is sometimes helpful, if you want to be disciplined about repaying.
Shared ownership schemes are becoming more available - they're often aimed at first-time buyers who can't pay a big deposit, or easily afford the payments on a full mortgage. The idea is that you partly buy and partly rent your house.
For example, you might buy 75 per cent, and take out a mortgage on that. Then you pay rent on the other 25 per cent. You still have to pay a deposit on the share that you're buying - but it can work out cheaper per month than buying the house entirely. And when you can afford more repayments, you can increase the share you're buying. For shared ownership you have to buy a house or flat from a housing association, or sometimes a property developer. That often means it'll be a new-build property, especially if you choose one of the special schemes backed by the government. The housing association sometimes has first-call on the property if you want to sell it. And not all banks and building societies will lend for shared ownership - but most do.
End transcript
Interactive feature not available in single page view (see it in standard view).

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371