Mortgage types explained: What different types of mortgages are available in the UK?, by Matt Stevens
There are many types of mortgage available in today's market and knowing which one you need to apply for is essential if you want to get the right deal for you.
Though all types of mortgage function in a similar way, factors like interest rates, repayment methods, and fees can differ between products. Because of this, finding the best deal isn't simply a case of choosing the lowest rate, but more about finding the right mortgage to suit your financial situation.
To help you get up to speed, we've put together this guide to explain different types of mortgage available in the UK, as well as discussing their pros and cons. Firstly, we'll look at the differences between repayment and interest-only mortgages, the two main predominant types you need to know about. We'll then move onto variable and fixed-rate mortgages, which are both types of repayment mortgage. We'll also cover:
- Buy-to-let mortgages
- Capped-rate mortgages
- Discount mortgages
- Flexible mortgages
- Guarantor mortgages
- Help to Buy mortgages
- Joint mortgages
- Offset mortgages
- Standard variable rate mortgages
- Tracker mortgages
- 95% mortgages
Interest-only mortgage vs repayment mortgage
Most types of mortgage fall into the category of a repayment mortgage, apart from interest-only mortgages. Below we've taken a closer look at what each one is and how they differ.
What is a repayment mortgage?
A repayment mortgage is a type of mortgage where you repay some of the capital amount you've borrowed, as well as some of the interest on the loan. The aim is to pay back the original loan amount plus interest over the term agreed when you take out the mortgage, allowing you to build equity over time and eventually own your home outright.
If you move during the duration of the mortgage, you have the option to repay the original loan and then take out another mortgage, or transfer your current deal to your new home — a process known as porting your mortgage.
Almost every type of mortgage is a repayment mortgage. The only exception is an interest-only mortgage, which we'll cover next.
Who is this type of mortgage for? A homebuyer who wants to build up equity in their home and own the property at the end of the repayment period.
What is an interest-only mortgage?
An interest-only mortgage requires you to pay the interest on the mortgage amount each month, but not any repayment towards the capital you've borrowed. Instead, the loan amount is paid back at the end of the mortgage period, so you will need to make sure that you have the means to repay the whole debt. This differs from a repayment loan, where the amount is paid back incrementally alongside the interest.
The advantage of an interest-only mortgage is that your monthly repayments will be much lower than any other mortgage product. However, you will need to make sure that you've accumulated enough funds to repay at the end of the term, or you may have to sell the property to cover what you owe. And, as you'll be paying back interest on the whole loan, rather than a decreasing amount, an interest-only deal will cost more than a repayment mortgage in the long run.
Who is this type of mortgage for? A buyer who wants to benefit from lower payments each month but is sure that they will have enough funds to pay off the mortgage when it is due.
Variable-rate mortgage vs fixed-rate mortgage
Variable-rate mortgages and fixed-rate mortgages are both types of repayment mortgage, but they differ in how the interest rate is calculated. Let's look at the main differences between the two and who may benefit from each product.
What is a fixed-rate mortgage?
With a fixed-rate mortgage, the interest rate is fixed for a set amount of time and won't be affected by Bank of England base rate rises or fluctuations in the market. This fixed interest rate is often referred to as the introductory rate. Once you've taken out a fixed-rate mortgage, you will be locked into the introductory rate for a set period of time, and if you leave you'll be subject to exit fees.
Typically, the fixed rate period (also known as the initial rate period) is the first two, three, or five years of the term. During this time, you will know exactly how much you will be paying each month, and this won't change until the fixed period has expired, making it easier to budget. When you take out an interest-only mortgage, you will effectively be locking in your mortgage interest rate, which can be very handy if you think that the Bank of England's base rate will be increasing soon.
The certainty of fixed-rate mortgages makes them very appealing for first-time buyers who are looking to budget for the first few years in their new home or homeowners who want to be certain what they're paying back each month.
The downside is, once you're locked into an initial term, you'll find it difficult to switch again due to a hefty penalty that most lenders will attach to their products. In addition, you won't be able to benefit from falls in interest rates should they occur during your term, but you'll also be protected from any hikes in the rates.
Once you've reached the end of the fixed-rate period, you'll be switched to your lender's standard variable rate, which will likely be higher. At this point, many people choose to remortgage in order to switch to a better deal — you can find out more about this process and how it could benefit you in our remortgaging guide.
Who is this type of mortgage for? A fixed-rate mortgage is a great choice for someone looking for security and the ability to accurately budget at the beginning of their mortgage, such as a first-time buyer. They're also suitable for homeowners who want to lock in a good mortgage rate, especially if they believe the base rate is due to rise at some point.
What is a variable rate mortgage?
A variable rate mortgage is a product in which the interest rate can shift at any time, either to a higher or lower amount. Unlike a fixed-rate mortgage, there is no period where the rate is locked in, and how much you pay each month is subject to change. This type of mortgage is affected by the Bank of England's base interest rate, as well as other factors.
Also, there is more than one type of variable rate mortgage to consider. For each one, the interest rate you pay is calculated slightly differently, giving each one advantages and disadvantages depending on what your needs are. Below we've listed the main types of variable rate mortgages: standard variable rate, tracker, discount, and capped-rate.
What is a standard variable rate mortgage?
A standard variable rate (SVR) mortgage has an interest rate that is set by the lender. This rate is not directly linked to the Bank of England, though in the majority of cases it is the primary influence on whether it increases or decreases.
A lender can increase or decrease the mortgage rate that you are paying on a month to month basis, so you could end up paying more or less depending on their decision. This makes it difficult to budget for the future. On the other hand, being on an SVR allows you to have more freedom: you can overpay or leave your mortgage without fear of high penalties for doing so.
SVR is also the rate that a lender will transfer you to once your fixed-rate deal has expired, which means you will usually end up paying a higher interest rate if you don't remortgage in time. Check out our remortgaging advice service if you need guidance.
Who is this type of mortgage for? Homeowners who want the freedom to switch mortgage products at any time or if you can see yourself moving home in the future.
What is a tracker mortgage?
A tracker mortgage is a type of mortgage deal where the interest rate is equivalent to the Bank of England base interest rate, plus a few percentage points set by your lender. For example, if the base rate is 0.5%, you might pay that plus 3% for a rate of 3.5%. This means that when the base rate falls, your mortgage rate will 'track' it downwards and you will pay less. However, the same happens when the base rate rises, so you could end up paying a higher amount each month.
Most tracker mortgages are offered with introductory deals, where you'll be on the tracker rate for a set period of years, though there are some 'lifetime' deals that last for the duration. Lenders tend to transfer you to their SVR once the introductory deal is finished. In addition, some lenders will set a minimum rate for you to pay, no matter how much the base rate drops.
Who is this type of mortgage for? Those that are confident that the base rate is set to fall but can comfortably pay more if the rate increases again over time.
What is a discount mortgage?
A discount mortgage sees you paying a reduced version of your lender's standard variable rate. The amount of discount is fixed, and the reduction is applied whether the SVR is increased or decreased by the lender. For instance, if the SVR was set at 4.5% and your deal applied a fixed 1.5% discount, you would only pay a 3% mortgage rate. If the lender decreased the SVR to 4%, your rate would be reduced to 2.5%.
The majority of discount mortgages are only available for an introductory term (much like a tracker mortgage), after which you'll be switched to the lender's SVR. Many deals are also stepped, so you will get access to the best discount for a set term, before switching to a lesser discount for the remainder of the introductory period. Additionally, some discount mortgages are capped so that there is a rate they can't fall below or increase above.
Who is this type of mortgage for? People, such as first-time buyers, looking for a cheaper rate during an introductory period, who can accommodate paying more should the SVR increase.
What is a capped-rate mortgage?
A capped-rate mortgage is a type of variable rate mortgage that will not rise above a certain rate, also known as a cap. These deals are most commonly available as SVR or tracker mortgages, which follow the standard model of these types but with a built-in cap. In the current climate, capped rates are quite rare for lenders to offer.
The advantage of a capped-rate mortgage is that you'll have the peace of mind that your repayments will never rise to a level you can't afford. However, while some deals have no minimum rate, a lot of capped-rate mortgages also have something known as a collar, which is another cap that prevents your rate falling below a certain level. So, on one hand you may be protected from high rates, but there's a possibility you won't benefit from a low rate, either.
Who is this type of mortgage for? Homeowners who want to be protected from rising rates and are willing to forgo benefitting from a potential fall in mortgage rates.
What are the other types of mortgage?
If you've considered variable rate and fixed-rate mortgages, you may find yourself wondering whether there are any other types that may suit your financial situation. There are a number of mortgages that have specialised terms that are also worth considering.
What is an offset mortgage?
An offset mortgage allows you to link your mortgage and your savings together to reduce the amount of interest you are charged. It works by offsetting the value of your savings account against how much you borrowed for your mortgage loan, so that you are only charged interest on the amount left over. Because your mortgage rate is applied to a reduced figure, the amount of interest you pay each month will be lower.
For example, if you have £15,000 in savings and a £100,000 mortgage, you would only pay interest on £85,000. At an interest rate of 3%, that means you'd be paying £2,550 in interest per annum, as opposed to £3,000.
Many lenders will offer you the choice of either reducing your monthly payments over the same loan duration or keeping the same level of payments and paying of your loan over a shorter duration. It should also be noted that when you offset your savings, you won't be able to earn interest on them. However, you don't pay tax on them either, which can be beneficial if you are in a high tax bracket.
Who is this type of mortgage for? Homeowners who have a lot of savings that they don't have immediate plans for, especially those in a high tax bracket. They're also useful for those who want to help a relative who is a first-time buyer, as some lenders allow you to offset your own savings so that another can access a better rate.
What is a 95% mortgage?
A 95% mortgage is a mortgage that allows you to borrow 95% of the loan amount with just a 5% deposit, meaning your loan to value ratio (LTV) will be 95%. For instance, you could secure a loan for £237,500 with a deposit of just £12,500.
Because there is a big risk of falling into negative equity with a smaller deposit, lenders will tend to charge a much higher interest rate on 95% mortgage loans to cover potential losses. While they can be useful for those struggling to save for a deposit, they can make it difficult to build up equity in your home. In turn, this could mean that you won't be able to remortgage to a better deal with a lower interest rate when your deal ends.
If you would like more advice, our guide to saving for a house deposit has a lot of advice that can get you on the right path to taking out a better mortgage deal.
Who is this type of mortgage for? Those who are struggling to put together the deposit to secure other types of mortgage but will be able to pay a higher interest rate over the course of the loan.
What is a Help to Buy mortgage?
The Help to Buy scheme is an initiative set up by the UK government with the aim of helping more people become homeowners. The scheme offers three solutions to help prospective buyers:
- Help to Buy ISA: A special ISA savings account for first-time buyers saving for a deposit, where the government will boost your savings by 25%.
- Help to Buy Equity Loan: A loan offered by the government to help people make up the difference with their deposit for a new-build house. You can borrow up to 20% of the property's value so that you can secure a 75% mortgage with only 5% of your own money.
- Help to Buy Shared Ownership: An option for those who can’t afford 100% of a mortgage loan on a home. Instead, you can buy a share of 25–75% of a property's value, then pay rent on the remaining share.
The term 'Help to Buy mortgage' was often used to refer to the Help to Buy Mortgage Guarantee scheme, which ended in 2016. This scheme was designed to help buyers take out 95% mortgages with a 5% deposit, with the government taking on more of the risk and protecting the lender.
At The Mortgage Genie, we offer a Help to Buy mortgage advice service that will help to identify the right scheme for you, as well as taking you through the application process.
Who is this type of mortgage for? Prospective homeowners who need more support when they are saving to buy a home, especially first-time buyers and those looking to move to a new-build house.
What is a flexible mortgage?
A flexible mortgage is a product that is designed to give you more freedom in how you repay, usually by allowing you to overpay and underpay your loan. There may also be other features available, such as the ability to take a payment break, borrow money back, and have your interest calculated daily. To accommodate some of these extra features, lenders are more likely to charge a higher interest rate than regular mortgage deals.
We've covered some of the most common features of flexible mortgages below:
- Overpayment: When you overpay your mortgage, you're paying more than the agreed amount to reduce the balance. A flexible mortgage will allow you to do this, though there may be a cap (e.g. 10% of the balance). Most people overpay as a lump sum when they have spare funds or as a regular overpayment made each month. If you keep up with your normal payments otherwise, overpaying will reduce your mortgage term and the overall interest paid.
- Underpayment: You may be allowed to underpay, which means that you are repaying less than the required monthly amount. Bear in mind that this will most likely be subject to approval by your lender and depend on whether you've overpaid enough to cover the underpayments you plan on making.
- Payment breaks: Another feature offered is the ability to take a payment break, where you don't make your regular payments for a month or two. This is a useful option if you are anticipating a period when your finances will be stretched. You'll probably need to apply for one with your lender, who will take into account whether you've overpaid or have been repaying your mortgage for enough time. It's also important to know that interest is still charged during your break, so you will most likely face higher payments on your return.
- Borrow back: Some deals allow you to borrow back money when you've overpaid it. As we've mentioned, the purpose of overpaying is to reduce interest, but if there comes a time when you need money to pay for something, a flexible product allows you to access funds you've already put towards your mortgage. In addition, this is a pretty efficient way of saving, as the reduced interest you benefit from by overpaying is likely to be greater than the interest earned in a savings account.
- Interest calculated daily: With a flexible mortgage, you can have your interest calculated daily, which is less expensive than when it is calculated monthly or yearly. This is because any payments made are included right away, so that the interest calculation for the next day takes into account your reduced balance. This works well for overpayments, as any extra you contribute towards the balance is immediately counted.
Who is this mortgage for? Buyers who need a bit of financial flexibility or those that want to overpay their mortgage deal to reduce overall interest.
What is a buy-to-let mortgage?
A buy-to-let mortgage is a product aimed at prospective landlords who want to purchase a property to rent out to others, rather than as a residence.
There are some key differences between buy-to-let and residential mortgages. Firstly, rather than assessing the amount you can borrow solely on your own personal income, lenders will consider the level of rent that you're expect to receive from your tenants. Typically, a lender will require annual rent to be 125% of the mortgage repayments.
The fees and interest rates are usually higher than regular products, and the minimum deposit required is typically 20–40% of the property's value.
Both interest-only and repayment buy-to-let mortgages are available, but most landlords tend to choose an interest-only product due to the lower monthly payments. However, a repayment buy-to-let mortgage is an option if you wish to avoid paying off a large amount of money later and would prefer to pay some of the capital off every month.
To take out a buy-to-let loan, the majority of lenders will require you to have a good credit record and income, as you will usually be taking on the responsibility of a second mortgage. Almost all lenders will not consider first-time buyers for a buy-to-let loan, either.
If you're thinking about becoming a landlord, our buy-to-let mortgage advice can help you find the deal that works for your property of choice. We'll also walk you through the application process and make sure all your paperwork is in place, which can be especially helpful for new landlords.
Who is this mortgage for? Prospective landlords who are looking to gain income in rent or expand their property portfolio for additional revenue.
What is a joint mortgage?
A joint mortgage is a product that allows you to take out a mortgage loan with one or more other people. Each person who is named on the mortgage agreement is responsible for repayment, and you will have to decide on an equity split between yourselves. You can apply for joint deals in most of the mortgage types described in this guide.
The most common joint mortgages taken out are between couples looking to secure a home, but these products are also open to groups of more than two people. So, whether you've got friends or family you plan to live with, a loved one who wants to help you buy a home, or a business partner making a joint investment, you can pool your resources to buy a property.
By applying for a joint mortgage, it's possible to put your incomes together to purchase a more expensive property than you could afford on your own. Just like a regular mortgage application, a lender will look at your earnings, credit history, and monthly spend to calculate how much you can borrow, but they'll do this for each person and come up with a combined offer.
And, with two or more people, you may be able to put your savings together for a higher deposit than on your own, giving you access to a selection of mortgage products with more favourable rates and terms. That being said, you will need to take the time to discuss options with your co-buyer to ensure that you choose a deal that suits everyone.
No matter if you're a first-time buyer, moving home, looking for Help to Buy guidance or you and a partner want to take out a buy-to-let mortgage together, the team at The Mortgage Genie can provide advice to help you find the best joint deal. We'll help you through every stage of your application, giving you peace of mind when buying property.
Who is this mortgage for? Couples or groups of people who'd like to own a property together and are willing to share responsibility for a mortgage loan.
What is a guarantor mortgage?
A guarantor mortgage is a type of product designed to help those who aren't able to secure a mortgage on their own, by bringing in someone who can take on responsibility for the deal. If you can't afford a deposit, don't have enough income, or have a poor credit record, a family member or friend can act as a guarantor who will agree to cover any missed repayments, should they occur.
While a guarantor can help you to afford a property, they won't own any of it or be named on the deeds. They only take on the financial responsibility for the deal, which requires them to provide a security for the lender. This usually involves either putting their own home on the line or a placing a lump sum into a savings account until an agreed portion of your mortgage has been paid.
Most lenders will accept a friend or family member as a guarantor, but some require it to be a close family member. A guarantor will also need to own their own property (or a good level of equity), have enough income to cover repayments, and possess a strong credit record. Many lenders also ask for proof that your friend or family member has sought legal advice before agreeing to a deal.
Like any mortgage application, how much you can borrow depends on your financial situation. But, adding a guarantor to the equation often gives you more options. For instance, a lender could offer you a 100% mortgage that allows you to borrow the full value of the property without a deposit, or they may be willing to include your guarantor's income into their affordability calculations, so you're able to take out a bigger loan than you would on your own.
At The Mortgage Genie, we specialise in assisting those who might not be able to get a mortgage on their own with our range of mortgage services. Whether you're struggling to be accepted for a loan due to credit issues or something else, our team can help you explore your lending options, including guarantor mortgages. You may also benefit from reading our mortgage eligibility guide, which has a lot of information about which options may be suited to you.
Who is this mortgage for? Anyone who needs a helping hand to secure a deal or needs assistance taking out a bigger loan, and has a friend or family member who is willing to take on the financial responsibility on their behalf.
We hope this guide has helped you understand what the many types of mortgage are and how they might suit your needs. If you have any questions about any of these products or anything else covered here, feel free to give us a call on 033 33 44 33 72, use our live chat feature, or send us a message.