The main types of mortgage include fixed rate, tracker and variable deals, plus repayment and interest-only options, and the right one depends on your circumstances and how much certainty you want. This guide explains how each type works, what sets them apart, and how to weigh up which suits you.
Different mortgage types and how they work
Mortgages come in all different flavours with slightly confusing names. Understanding which one is best suited for you the best place to start.
Let’s get into it:
Repayment mortgage
With a repayment mortgage, your monthly payments cover some of the money you borrowed (the capital) as well as the interest. If you keep up with your payments, you should have paid off your mortgage in full by the end of your mortgage term - the dream!
Interest-only mortgage
With an interest-only mortgage, your monthly payments cover only the interest, not the capital you borrowed. This means your payments can be lower, but you’ll still owe the original amount at the end of the mortgage term.
If you choose an interest-only mortgage, you’ll need a plan for paying off the capital, such as investments or savings.
Mortgage types based on how your interest rate works
Fixed-rate mortgage
With a fixed-rate mortgage, your interest rate stays the same for a set period of time, usually about two, five or even ten years. This means your monthly mortgage payments should stay the same during your fixed-rate period, even if the Bank of England base rate changes.
For many people, this can provide peace of mind as you’ll know what your mortgage payments will be each month and is generally the most popular type of mortgage out there, particularly for first time buyers.
Tracker-rate mortgage
A tracker-rate mortgage follows the Bank of England base rate, usually at a set percentage above or below it. This means your mortgage interest rate can change when the base rate changes.
If the base rate goes up, your mortgage payments could increase. If it goes down, your payments could fall.
Standard variable rate mortgage (SVR)
A Standard Variable Rate (SVR) is a lender’s standard mortgage interest rate. You might move onto this rate when your fixed- or introductory-rate comes to an end, unless you switch to a new mortgage deal.
Your lender can change its SVR, so your monthly payments could go up or down. SVRs don’t necessarily move in line with the Bank of England base rate, so changes will depend on your lender. Generally speaking, this rate is something to avoid as a banks SVR is more expensive than other mortgage types.
Discounted-rate mortgage
A discounted-rate mortgage gives you discount on your lender’s Standard Variable Rate for a set period of time. The rate can still go up or down if your lender changes its SVR, so keep in mind that your payments could change too.
Offset mortgage
An offset mortgage links your mortgage to a savings account, and sometimes a current account. Your savings are offset against the amount you owe on your mortgage, so you only pay interest on the difference.
Say you owe £200,000 and have £20,000 in linked savings. You’d only pay interest on £180,000. Your savings don’t clear the debt, they just sit alongside it, lowering the interest you’re charged for as long as they’re there.
How long should your mortgage term be?
Your mortgage term is just how long you have to pay off your mortgage. A longer term could mean lower monthly payments, but you’ll usually pay more interest overall. A shorter term often means higher monthly payments, but less interest over time. It really comes down to what your finances look like now and what you think they’ll look like in the future.
Which type of mortgage is right for you?
Choosing a mortgage isn’t one-size-fits-all. The type that could work for you will depend on your lifestyle and finances; for example, if you’re buying your first home, moving house or you’re self-employed.
Let’s take a look at some of the different situations you might be in and the mortgage types you could consider:
What mortgage is right for a first-time buyer?
Buying your first home is exciting, but there’s a lot to think about beyond what colour to paint the en suite. As well as finding the property and saving a deposit, you’ll need to think about which mortgage type could work for you.
A repayment mortgage is a common choice for first-time buyers as your monthly payments go towards both the money you’ve borrowed and the interest you’re paying on it. You’ll also need to decide whether a fixed-rate or variable-rate mortgage could work for you, depending on your budget and how you feel about your monthly payments changing.
Your deposit can also affect the mortgage deals available to you. Generally, the larger deposit means a lower loan-to-value (LTV) which could give you access to a wider range of deals.
What mortgage is right if you’re buying on your own?
Buying a home on your own means you’ll be covering the mortgage by yourself, so keeping your monthly payments manageable is key.
A repayment mortgage could be a good starting point, with fixed or variable rates depending on how comfortable you are with your payments changing. We have a handy guide explaining all you need to know about how to get a mortgage if you’re buying on your own.
What mortgage is right if you’re self-employed?
Being self-employed doesn’t mean you’re limited to certain types of mortgages. You can generally choose from the same mortgage types as other people looking for a mortgage, including fixed-rate, tracker and repayment mortgages.
The main difference is often how the lender looks at your income. You might need to provide documents like accounts and tax calculations. If you’re self-employed, a mortgage adviser can explain what lenders will need from you and help you understand what mortgage types you could consider.
What mortgage can I get with a small deposit?
A small deposit doesn’t mean you can’t get a mortgage. For example, a 5% deposit would give you a 95% loan-to-value mortgage. A larger deposit could give you access to more mortgage deals, but your options will also depend on your income, credit history and what the lender requires from you.
If you’re buying your first home, you might also find specific mortgages aimed at buyers with smaller deposits.
What mortgage is right when moving home?
If you’re moving home, you’ll have the option to take your existing mortgage with you through a process known as porting. Whether this is possible depends on your mortgage lender, so make sure you check when you speak to them.
You could also choose to take out a new mortgage for your next home. This gives you the chance to review your mortgage type, interest rate and term based on your new circumstances.
Just make sure you check whether Early Repayment Charges or other fees could be before making a change.
Buy-to-let property mortgages
If you’re buying a property to rent out rather than live in, you’ll usually need a specific buy-to-let mortgage. These work a little differently from residential mortgages, with lenders looking at things like the rental income the property could make.
Need help choosing a mortgage?
A mortgage is a long-term commitment, so it’s understandable if you’re still not sure which type is right for you. Speaking to a mortgage adviser can help, they can talk you through the different types of mortgages available and advise you on which could work for your circumstances.
The first appointment is free, so if you’d like a chat about what you’re looking for, get in touch for more information.
Learn more about when to consider a mortgage adviser and how they can support you through the mortgage process.
Ready to chat? Our advisers are ready to call you back today. The first chat costs nothing and is totally free of obligation.
Something to bear in mind...
FAQs
It depends on you. The right choice between a fixed-rate and variable mortgage will depend on your budget and how comfortable you are with your payments going up or down. A fixed-rate mortgage can make monthly payments more predictable, which some people prefer for peace of mind.
When your fixed-rate mortgage ends, you’ll usually move onto your lender’s Standard Rate Variable (SRV), unless you switch to a new mortgage deal.
Yes, you can usually change your mortgage type when you switch to a new mortgage. What you can get will depend on your lender and how you’re doing money-wise, so speaking to a mortgage adviser can help you understand which mortgage types you could consider.
You can usually fix your mortgage interest rate for a set period, such as two, three, five or ten years. The length will depend on the mortgage deal available and what works for your budget and lifestyle.
You may be able to pay off your mortgage early, but it’s important to check if you need to pay an Early Repayment Charge depending on your mortgage deal. Take a look at your mortgage terms to see whether any changes apply before paying it off early.