What are the Different Types of Mortgages?

Different Types of Mortgages Explained

So, what are the different types of mortgages?

If you’re looking to buy a property, one of the most important aspects to consider is the type of mortgage you wish to take out. This is a vital decision because choosing the right mortgage deal can save you thousands of pounds.

Which type of mortgage is most suitable to you will depend on your individual circumstances, however once you know the different types of deals available, it’s easier for you to narrow down your choice of options.

To help you understand exactly what is meant by each deal, we’ve produced this guide explaining some of the different types of mortgages and how they work.

Repayment & Interest-Only Mortgages

Your mortgage will either be a repayment or interest-only mortgage.

Repayment mortgages are much more common and refer to a type of mortgage whereby you pay off some of the loan as well as some interest with each monthly payment. You’ll gradually pack back the money you’ve borrowed so that by the end of the mortgage term you’ve repaid the whole amount (plus interest) and own your property outright. This type of mortgage is also known as capital and interest mortgages.

Interest-only mortgages, on the other hand, means you repay the interest you owe each month but not any of the capital you’ve borrowed. You instead pay off the entire loan at the end of the mortgage term. Your monthly payments will be much lower, but you’ll need to have saved up enough by the end of your mortgage term to repay the amount you’ve borrowed in full.

Fixed Rate & Variable Rate Mortgages

There are two main types of mortgage:

  • fixed rate mortgages
  • variable rate mortgages (which include standard variable rate, tracker, discount and capped rate mortgages)

Fixed Rate Mortgages

With fixed rate mortgages, you will always pay the same amount every month. So regardless of interest changes elsewhere, your lender guarantees your interest rate will stay the same throughout the entire deal period (which is usually between 2 – 5 years, but 10-year fixed rate deals are also available).

This provides peace of mind and helps you to budget as your monthly mortgage payment won’t change. The downside of this, though, is that if interest rates fall, you will be locked into your fixed rate deal.

Standard Variable Rate (SVR) Mortgages

After the fixed period finishes, you will normally move onto your lender’s standard variable rate (SVR) by default. This is the normal interest rate your lender charges and will last as long as your mortgage or until you take out another mortgage deal.

Each lender has its own SVR that it can set at whatever level it wants – they can also change their SVR at any time, so your payments could increase or decrease.

Tracker Mortgages

A tracker mortgage is a variable-rate mortgage that follows the Bank of England’s base rate and rises or falls along with it. So, if the base rate goes up or down, so does your interest rate.

Tracker mortgages typically charge the base rate plus a few percent.

Discount Mortgages

This type of mortgage means you get a discount on the lender’s SVR for a certain period of time (normally 2 to 5 years). For example, if your mortgage lender’s SVR is 3.5% but your mortgage came with a 1% discount, you’d pay 2.5% for the specified period of time.

This is also a type of a variable-rate mortgage, so the amount you pay each month can change if the lender changes their SVR.

Capped Rate Mortgages

Capped rate mortgages implement a cap on how high the interest rate can rise. This is still a variable mortgage, but it provides certainty as the rate won’t rise above a certain level.

As this type of deal provides additional security, interest rates tend to be higher than other types of variable mortgages.

Other Types of Mortgages

Flexible Mortgages

Flexible mortgages include terms that enable you to overpay and underpay as well as take payment holidays. They are usually taken out by people who are unsure of steady income month to month, like those who are self-employed, for instance.

They are generally offered at an increased interest rate.

Offset Mortgages

Offset mortgages allow you to use your savings to reduce the amount of interest you pay on your mortgage. Your savings and current account are linked to your mortgage so that you only pay interest on the difference. For example, someone with a £250,000 mortgage and £50,000 savings will only pay interest on £200,000. In most cases, to be eligible for an offset mortgage, the savings account and mortgage will need to be with the same provider.

Cashback Mortgages

With a cashback mortgage, you will receive cash when you take out your mortgage. How much you receive is usually either a percentage of the amount you’re borrowing or a fixed amount.

Having a lump sum of cash can help with things like the costs of furniture and repairs to a new home, but lenders do often charge a higher interest rate when compared to other types of mortgages.

Mortgage Advice with The Mortgage Heroes

We hope this short guide has helped to explain the different types of mortgages available and helped you to understand which is suited to you. When looking for mortgage deals, don’t forget to look at the fees for taking them out as well as the exit penalties.

If you are looking to find and secure a mortgage deal, please don’t hesitate to get in touch with The Mortgage Heroes today. We’re experienced whole of market mortgage brokers supporting people of all backgrounds in the UK find the right mortgage.

From contractor and self-employed mortgages to remortgages, first time buyer mortgages and bad credit mortgages, we provide professional help for all situations and circumstances.

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