If you are planning to buy a house in the UK and require a mortgage, we hope you’ll be pleased you found this page.
Buying a property is an exciting time, but understanding the different types of mortgages will be crucial.
The good news is that our team here at The Mortgage Pod are here to help you with every step of the mortgage journey.
Choosing the right mortgage could help you save money, make your monthly payments more manageable, and enable you to get the best deal specific to your individual circumstances.
In this guide, we’ll walk you through the most common types of mortgages available in the UK and give you all the knowledge you need to make an informed decision for yourself and your family.
Before we begin, there are a few terms you may want to familiarise yourself withe, specially if you’re exploring different types of mortgages:
- Standard Variable Rate (SVR): The lender’s basic interest rate, which can change at any time. If your mortgage switches to the SVR, your monthly payments may go up or down.
- Loan-to-Value Ratio (LTV) = The percentage of the property’s value you’re borrowing. For example, if you’re buying a £300,000 property with a £30,000 deposit, the LTV is 90%.
- Equity: The portion of your property that you own outright. The property’s market value minus any outstanding mortgage balance.
- Early Repayment Charge (ERC): A penalty fee that lenders will likely charge if you paid off your mortgage early or switched deals within the Initial Benefit Period, such as the fixed rate period.
Fixed Rate Mortgages
A fixed-rate mortgage is one of the most popular types of mortgages in the UK, and it’s easy to see why—it offers stability and predictability.
Fixed rate mortgages involve agreeing to a set interest rate with your lender for a specific term.
This is just one of the types of mortgages that offer protection against interest rate increases during the fixed period.
The interest rate remains fixed for a set period, typically between 2 to 5 years, although fixed rates for as long as 40 years are also available!
Choosing a fixed rate mortgage ensures that your interest rate remains unchanged throughout the fixed period.
Pros of Fixed Rate Mortgages :
- Predictable payments: You know exactly how much you’ll pay each month, making it easier to budget.
- Protection from rising rates: Even if the bank increases the base rate, your payments won’t change during the fixed term.
Con of Fixed Rate Mortgages:
- No benefit from falling rates: Since your mortgage rate is fixed, you might miss out on savings from a lower rate environment.
- Higher rates after the fixed period: When your fixed period ends, your mortgage will likely switch to the lender’s Standard Variable Rate (SVR), which can be much higher.
- Tie in period: A penalty known as an Early Repayment Charge (ERC) will likely apply for the duration of the fixed rate mortgage period, should you wish to change your product.
Example: Let’s say you get a fixed-rate deal at 4.15% for two years. Even if the bank or mortgage lenders lower lower rates during this time, your monthly payments will remain the same.
But, after two years, if you didn’t remortgage, you would revert to the lender’s SVR (currently averaging 8.16%) which could significantly increase your monthly payments unless you secure another deal before it runs out.
You may wish to check our our guide on when to remortgage HERE
Variable Rate Mortgages
Another common type of mortgage is the variable rate mortgage. Unlike fixed-rate mortgages, this type of mortgage fluctuates depending on the lender’s SVR or the Bank of England Base Rate. It’s one of the riskier types of mortgages as your monthly payments could increase or decrease with little warning.
Pros of a Variable Rate Mortgage:
- Lower rates if interest falls: If the lender’s SVR or Bank of England Base reduces, then your payments would likely decrease. That’s good news, right?
- Flexibility: Some variable-rate mortgages come without Early Repayment Charges (ERC), this can make it easier to switch deals or overpay if required.
Cons of a Variable Rate Mortgage:
- Unpredictability: If interest rates rise, your monthly payments could increase, making it harder to plan your outgoings. An extra stress nobody needs!
Types of Variable Rate Mortgages:
There are different types of mortgages within the variable rate category, such as Standard Variable Rate (SVR) mortgages and Tracker mortgages, which track the Bank of England’s base rate. Understanding these types of mortgages helps in making a decision based on your risk tolerance and financial goals.
- Standard Variable Rate (SVR) Mortgages: These follow your lender’s SVR, which can change at any time. With the average SVR currently at 8.16%, this can lead to much higher payments if your mortgage switches to this type of interest rate after a fixed term.
- Bank of England Base Rate Tracker Mortgages: Often referred to as “Tracker mortgages”. These track the Bank of England’s Base Rate, plus a certain percentage. For example, if the Base Rate is 5% and your mortgage is base rate + 1%, you’d pay 6% overall. As of October 2024, tracker mortgage rates start around 5.24%.
- Discount mortgage: This is where a lender sets your interest rate at an agreed percentage under their SVR. For example, 8.16% minus a 3% discount, giving you a rate payable of 5.16%.
Interest-Only Mortgages
This is one of the types of mortgages where as you probably guessed, you only pay the interest each month, not the actual amount you have borrowed.
This makes your monthly payments lower, but remember, the full loan amount will still be waiting for you when the mortgage term ends.
Pros of the Interest Only Mortgage:
- Lower monthly payments: You only pay the interest, so your outgoings are lower.
- Cash flow flexibility: This option can free up money for other investments or expenses.
Cons of the Interest Only Mortgage:
- Loan due at the end: You still owe the full loan amount at the end of the mortgage term, which means you need a solid plan to repay it.
- Riskier: If property values fall, you could owe more than the property is worth and find yourself in negative equity, certainly not ideal!
Example: Let’s say you take a £200,000 interest-only mortgage. Your monthly payment may be around £500 for the interest, but at the end of the term, you still owe £200,000, which you’ll have to repay through other means such as savings, selling the house, or… perhaps winning the lottery?
Repayment Mortgages
In contrast to interest-only options, repayment mortgages are types of mortgages where you pay both the interest and part of the capital each month. This type of mortgage ensures that by the end of the mortgage term, the loan will be fully repaid, and you’ll own 100%.
Pros:
- Full ownership: At the end of the term, you’ll own the property outright.
- No lump sum needed: Unlike interest-only mortgages, you won’t need to repay the full loan at once at the end of the term.
Cons:
- Higher monthly payments: Because you’re paying off both interest and capital, your monthly payments are higher than with an interest-only mortgage.
Example: If you have a £200,000 repayment mortgage, your monthly payment might be around £1,000, covering both interest and part of the loan. By the end of the term, the loan is fully repaid, and the house is yours.
Note: Both fixed-rate mortgages and tracker mortgages are available as either repayment mortgages or interest-only deals. Get started here with one of our expert mortgage advisors for impartial advice on the different types of mortgages available for your individual circumstances.
What is an offset Mortgage?
Offset mortgages are unique types of mortgages that link your savings account to your mortgage. This type of mortgage allows you to save on interest payments by reducing the amount of the mortgage you pay interest on, but often comes with higher interest rates compared to other types of mortgages.
For example, if you have a £200,000 mortgage and £20,000 in savings, you’ll only pay interest on £180,000.
Pros:
- Save on interest: You’ll end up paying interest on a smaller loan amount.
- Flexibility: You can access your savings if needed, unlike other types of mortgages.
Cons:
- No interest on savings: You won’t earn interest on your savings while they’re offset against your mortgage. Whilst it’s not the best investment plan, it’s not necessarily a bad choice.
- Higher interest rates: Offset mortgages can often come with higher rates compared to standard mortgages.
What is a Guarantor Mortgage?
Guarantor mortgages are one of the types of mortgages aimed at borrowers with poor credit history or limited deposits. This type of mortgage allows a family member or friend to act as a guarantor for you.
Pros:
- Higher borrowing potential: You may be able to borrow more with a small deposit.
- Helps people with bad credit: A guarantor mortgage makes it easier for those with poor credit to get a mortgage.
Cons:
- Risk for guarantor: The only downside is your guarantor is responsible for your mortgage if you can’t make the payments, which could potentially make things a bit stressful depending on your confidence in being able to cover the amount.
We would suggest reading our guide on Joint Borrower Sole Proprietor mortgages here to anyone considering a guarantor mortgage.
Buy-to-Let Mortgages
Buy-to-let mortgages are a specialised type of mortgage designed for those buying property to rent it out. These types of mortgages usually require a larger deposit and come with higher interest rates.
Pros:
- Rental income: You can use the rental income to cover your monthly mortgage payments, which are determined by your mortgage rate.
- Investment opportunity: Property prices can appreciate over time, increasing the value of your investment.
Cons:
- Higher upfront costs: Buy-to-let mortgages often require at least a 25% deposit.
- Tax implications: You’ll need to pay tax on any rental income, which is all well and good if you do it by the books.
Flexible Mortgages
Flexible mortgages are another type of mortgage that allows you to overpay, underpay, or even take payment holidays. This type of mortgage offers flexibility but often comes with higher interest rates than other types of mortgages. This option is great for people whose financial circumstances might change during the mortgage term.
Pros:
- Flexibility: You can make additional payments to reduce the overall debt faster, or underpay if your circumstances require.
- Payment holidays: You may be able to pause payments if necessary.
Cons:
- Higher interest rates: This flexibility will often come with a higher interest rate.
FAQs About Mortgages
What type of mortgage is best to get?
The best type of mortgage depends on a few factors such as your financial situation, risk tolerance, and goals, both short term and long term. If you want consistent monthly repayments and protection against any potential interest rate leaps, a fixed-rate mortgage is ideal. On the other hand, if you’re comfortable with the fluctuating payments and want to take advantage of falling rates, a variable-rate mortgage might suit you better. For those investing in rental properties, a buy-to-let mortgage could be the best fit. We’re here to offer expert advice and help you find the right mortgage deal, so please feel free to reach out at any time.
Is it better to get a fixed or variable mortgage?
When evaluating your options, fixed rate mortgages offer stability, while variable rates can offer flexibility. A fixed-rate mortgage is great if you’d prefer consistent payments and easier budgeting, especially if interest rates rise. A variable rate mortgage, such as a tracker mortgage, could offer lower initial payments and flexibility if rates fall, but it comes with the risk of higher payments if rates increase. Your choice depends on whether you value predictability or flexibility.
What are the main parts of a mortgage?
A mortgage consists of:
• The principal (the amount borrowed).
• Interest (what you pay to the lender).
Conclusion: Choosing the Right Mortgage
The UK mortgage market offers a variety of options that suit all financial situations. From fixed interest rate deals to tracker mortgages, the key is to understand your financial needs and long-term goals.
If you’re uncertain about the best option, consulting an expert mortgage advisor here at The Mortgage Pod will help you find the right path in this diverse market. Get Started here.
