When it comes to figuring out the right mortgage for you, the variety of choices can be overwhelming. Understanding what types of mortgages are out there, and figuring out the right type of mortgage for you can involve enormous amounts of research and time that many people just don’t have. Well, we’ve decided to make your research a little easier, with a helpful guide on all the different types of mortgages you can get!
Different mortgages do different things, and things like repayment methods and interest rates will differ between each. In this guide, we’re going to explore all the different types of mortgages available to you, why you may choose them, and how they differ.
. . . Article Warning . . .
Before you start reading this article, we just want to pre warn you, this is not for the faint-hearted! This is an in-depth guide exploring all the different types of mortgages you would typically find on the market, the differences between them and who would usually take out each kind.
Unfortunately, there is no quick and easy answer to finding the right mortgage for you; it is something that needs a lot of time and thought, and if you still have questions at the end of the article, we recommend getting in touch with us for any questions you may have. You don’t want to pick the wrong mortgage and be stuck paying more than you can afford!
Contents:
What is a repayment mortgage?
Repayment mortgages are pretty standard, and means that each month you repay some of the money back from the mortgage, along with some interest. The idea here is that over the term of your mortgage you will pay back the loan, and then the bank/mortgage provider will make some money on top of the loan in the way of interest. Once the mortgage term has ended, you’ll have been able to build equity, and own your home outright.
Repayment mortgages are the most popular choice for private homeowners in the UK by a huge margin.
What is an interest-only mortgage?
Interest-only mortgages aren’t nearly as common, and are arranged on the basis that you only repay the interest you owe each month, instead of repaying the loan. You’ll then pay off the original amount you borrowed at the end of your mortgage term. For example, if you took out £150,000 on an interest-only mortgage for a 25 year term, you would only pay the interest each month for 25 years, then when the term is up you would repay the full £150,000.
Although these types of mortgages aren’t as common, they are often used on buy-to-let properties, or those who are retired may take out an interest-only mortgage as the loan can be repaid from the sale of the property when they down-size to a smaller property or pass away.
You must be able to prove to your mortgage lender that you have savings, or a savings plan in place to be eligible for an interest-only mortgage. Other acceptable ways of repaying the debt can be selling your home to move to a cheaper property (often called down-sizing) or using part of your pension fund.
What is a fixed-rate mortgage?
A fixed-rate mortgage is exactly what it sounds like – your interest rates are fixed for an agreed period of time, generally between 2-10 years. Interest rates are usually affected by the Bank of England base rate, so as this changes, mortgage interest rates will change but with a fixed-rate mortgage, this won’t happen. This can be a positive when interest rates are increasing, but if the base rate falls below your fixed-rate, you won’t benefit. One major downside of this type of mortgage is ‘early repayment charges’ – a hefty fine imposed by the bank if you move lenders or change your deal before the fixed period ends.
What is a variable-rate mortgage?
A variable-rate mortgage is a type of mortgage where the interest rate is subject to change at any time. Interest rates on variable-rate mortgages are impacted by the Bank of England’s base rate, which can change at any time. Types of variable-rate mortgage include standard variable-rate mortgages, tracker mortgages, discount mortgages and capped-rate mortgages.
What is a standard variable-rate mortgage (SVR)?
A standard variable-rate mortgage, often called an SVR, is a type of mortgage where the interest rate is set by the mortgage lender, and not directly linked to the base rate set by the Bank of England (although it will be influenced by it).
Lenders are free to change your mortgage rate as they see fit, so your payments could change on a month-to-month basis, meaning your repayments will likely not be consistent through the term. If you take out a fixed-rate mortgage, when this mortgage term comes to an end, it is usually an SVR mortgage that your lender will switch you to if you don’t take any action. The only real positive of this type of deal is that you can transfer out of it without fees or penalties.
What is a tracker mortgage?
On the flip side, a tracker mortgage is a type of variable-rate mortgage where the interest rate is directly linked to the Bank of England base rate, however the lender will then add (or subtract) a set percentage.
For example, the current base rate is 4.0%, so if your tracker mortgage is the base rate plus 1.0%, your interest rate will be 5%. However if the base rate rises to 5%, your new rate will be 6%. Some tracker mortgages come with a ‘collar’ which is a minimum level the rate can fall to. So if your collar is 3% but the base rate falls to 2.5%, your rate will still be 5.5%; the minimum rate of 3% plus the base rate of 2.5%.
What is a capped-rate mortgage?
In the same way that a tracker mortgage might have a collar that means your interest rate can’t go below a certain rate, a capped-rate mortgage means that your interest rate will not increase above a certain rate. These are one of the more rare types of mortgages, especially with interest rates changing as frequently as they are, and can come with a collar as well as as a cap. There are now very few of these deals available through lenders.
What is a discount-rate mortgage?
A discount-rate mortgage is when the lender offers you a reduced rate off their SVR for a set period of time; usually two to five years. These can be a good option if you’re looking for a cheaper deal for the beginning period of your term, but as you’ll then switch to an SVR, it’s important to bear in mind that your interest rates will be subject to change from this point.
What is a offset mortgage?
Offset mortgages allow home-buyers to link their mortgage loan and savings together to reduce the interest they are charged each month. The name comes from the fact that you are offsetting the amount in your savings account against the amount you have borrowed, meaning you’re only charged interest on the amount left over.
As an example, if your mortgage amount is £150,000 and you have £25,000 in your savings account, the interest on your mortgage is calculated on £125,000 (your mortgage loan, minus the amount in your savings). Offset mortgages can either be taken out as a fixed or variable-rate, depending on the kind of mortgage you’re looking for. Offset mortgages can dramatically reduce the amount of interest you pay, which in turn means you repay the capital faster. This type of mortgage often outperforms leaving the money in a normal savings account because the amount of interest you’ll save on the mortgage is usually much more than the amount you would have earned on the savings.
What is a Help-to-Buy mortgage?
The Help-to-Buy scheme was a government initiative launched in 2013 with the intention to help more people become homeowners. Help-to-buy mortgages are often referring to the Help to Buy Mortgage scheme, created with the intent of allowing buyers to take out a 95% mortgage with a 5% deposit, boosted by an equity loan from the government of between 20-40%. This scheme ended in 2022..
You can find out more about securing a mortgage as a first time buyer with our helpful guide, or get in touch with us to explore what options are available to you.
What is a 95% mortgage?
A 95% mortgage enables home buyers to gain a mortgage with just a 5% deposit, meaning you are lent 95% of the capital you need to purchase the property. These types of mortgages often have much higher interest rates, due to the large risk of the buyers falling into negative equity.
Although they may appear a good option for those struggling to save, 95% mortgages are a bit less common in the current economy, and can make it hard to build up equity in your property.
What is a flexible mortgage?
Flexible mortgages are designed to give the buyer more freedom in how they repay their loan. Lenders may allow you to overpay, underpay, borrow back (if you’ve overpaid previously) or take payment breaks. You may find your interest rates are higher due to the extra features you’re benefiting from.
Although they may appear a good option for those struggling to save, 95% mortgages are a bit less common in the current economy, and can make it hard to build up equity in your property.
What is a buy-to-let mortgage?
If you’re looking to purchase a property with the intent to rent it rather than live in it, you’ll want to explore buy-to-let mortgages. When lenders are considering you for a buy-to-let mortgage, they won’t just consider your own personal income, but also the rent you’ll likely gain from the property. Generally, lenders will ask that annual rent be set to at least 125% of the mortgage repayments.
Buy-to-let mortgages tend to have higher interest rates and fees than other mortgages, with the minimum deposit typically sitting at around 20-40% of the value of the property.
What is a let-to-buy mortgage?
Let-to-buy mortgages are for those looking to rent out the property they currently own so they can buy a new one to live in. The let-to-buy mortgage will apply to the property they’re renting, while simultaneously obtaining a separate residential mortgage on the property they’re planning to live in.
These can be a good option for homeowners looking to move but are struggling to sell their property. Unlike a buy-to-let mortgage, let-to-buy mortgages will usually require the equity within an existing property to part-fund a new home purchase.
What is a joint mortgage?
Joint mortgages are generally chosen by couples or spouses, but can be obtained by anyone looking to get a mortgage with one or more other people. Each named person on the mortgage is responsible for repaying the mortgage, and the equity divided between each person.
Joint mortgages allow you to combine your income and savings with another person or persons, meaning you may have more money to put down as a deposit, or save money on repayments as you’re not paying the full amount each month. However it’s important to consider what happens to your joint mortgage if you separate.
What is a guarantor mortgage?
Guarantor mortgages are designed for those not able to secure a mortgage on their own, allowing the buyer to bring in a friend or family member to take responsibility if repayments aren’t kept up. The named guarantor won’t own any of the property, but will be required to take financial responsibility for the mortgage which gives a layer of security to the mortgage lender. This typically happens by the guarantor either putting a sum of money into a savings account until a portion of the mortgage has been paid back, or by naming their house as collateral.
What are specialist mortgage?
Most of the mortgages we’ve been through in this guide are standard mortgage offerings you can find from most mortgage brokers and lenders, however there are other mortgage products for more specialist situations that high-street lenders don’t accommodate. These include (but aren’t limited to):
What mortgage is best for you?
If you’ve got questions about the different types of mortgages that are available to you, and want to understand which option is the right choice, don’t hesitate to get in touch! Our team of experts have years of experience helping people secure mortgages across the country.
