Mortgage types UK

Last updated: January 2024 | 3 min read

Exploring mortgage options in the UK? Our guide unravels your choices, from fixed-rate to interest-only solutions. Gain insights into the impact of 2014 mortgage rules and their significance for first-time buyers. Embark on your tailored mortgage journey with confidence.

Introduction to mortgage types in the UK

Why mortgage type matters for your financial future

Mortgage type directly impacts your financial planning, both in the short and long term. It shapes how you manage monthly expenses and long-range financial commitments. The type of mortgage you choose can affect everything from your monthly cash flow to how quickly you can pay off your mortgage. Deciding between fixed-rate, tracker, or interest-only mortgages sets the tone for how you budget and save.

How to choose the right mortgage for you

Choosing a suitable mortgage involves assessing your financial situation, future plans, and risk tolerance. Begin by considering your stability of income, willingness to take risks with interest rates, and long-term financial goals. Your choice influences not only your monthly repayments but also the total amount repayable over the mortgage term. Reflect on your preferences for consistency in payments versus the potential for saving money when interest rates are low. Understanding the nuances of each mortgage type aids in making a choice that aligns with your financial objectives.

Fixed rate mortgage: Stability in your monthly payments

What is a fixed rate mortgage?

A fixed rate mortgage locks the interest rate for a set period. This period, known as the fixed rate period, can vary, typically ranging from two to ten years. During this time, your monthly payments remain unchanged, regardless of any fluctuations in the wider market interest rates. This type of mortgage provides predictability and security in your financial planning, allowing you to budget with certainty.

Benefits of fixed rate mortgages

Fixed rate mortgages offer peace of mind. With a consistent monthly payment, budgeting becomes simpler. You're shielded from sudden increases in interest rates, which can impact variable rate mortgage holders. This consistency can be especially appealing in an economic climate where interest rates are expected to rise.

However, these mortgages aren't just about predictability. If interest rates do increase, you could find yourself paying less than those on variable rate deals. Additionally, knowing exactly what you'll pay each month makes it easier to plan for other investments or savings.

Drawbacks of fixed rate mortgages

There are also limitations to fixed rate mortgages. Typically, these deals come with higher initial rates compared to variable rate mortgages. If interest rates fall, you won't benefit from reduced payments. This can mean paying more over the fixed period than you would have with a variable rate.

Early repayment charges (ERCs) are another consideration. If you decide to switch mortgages or pay off your loan early, these charges can apply. They're particularly prevalent during the fixed rate period. It’s vital to consider how long you're comfortable committing to a fixed rate, balancing the need for stability against the potential for change in your circumstances or interest rates.

Comparing fixed rate deals: What to look for

When comparing fixed rate deals, the interest rate isn't the only factor to consider. The length of the fixed rate period impacts your long-term planning. Shorter fixed periods might offer lower rates, but they require more frequent reassessments of your mortgage options.

Consider the overall cost of the deal, including fees and the standard variable rate (SVR) that the mortgage reverts to after the fixed period. A low fixed rate might seem attractive, but high fees or a significantly higher SVR can offset initial savings.

Lender reputation and service quality also matter. Researching customer experiences and lender flexibility can save future headaches. Finally, consider any linked products, like savings accounts, that might be part of the mortgage package. These could offer additional financial benefits.

Variable rate mortgages: Flexibility with risks

What is a variable rate mortgage?

Variable rate mortgages differ from their fixed-rate counterparts, primarily due to the fluctuating interest rate. This type of mortgage links its rate to either the lender's standard variable rate (SVR) or another rate such as the Bank of England's base rate. The most distinctive feature is the change in your monthly repayments as the rate changes, offering both opportunities and uncertainties.

Types of variable rate mortgages

Standard variable rate mortgage

A standard variable rate mortgage, typically abbreviated as SVR, follows the lender's own interest rate. Unlike fixed, tracker, or discount mortgages, the SVR isn't directly tied to England's base rate. Lenders have the freedom to set and change this rate, influenced but not dictated by external economic factors. Monthly repayments can vary, reflecting the rate's fluctuation.

Tracker mortgage

Tracker mortgages directly link their interest rate to another rate, often the Bank of England's base rate. The mortgage rate is set at a fixed margin above this base rate, ensuring transparency in how rates are derived. When the base rate changes, so does the tracker mortgage rate, and consequently, your mortgage repayments. These mortgages offer predictability in rate fluctuations, linked to a specific, visible rate.

Discount mortgage

Discount mortgages offer a reduction on the lender's SVR for a certain period, typically ranging from two to five years. The discount makes the initial rate period appealing due to lower repayments. However, it's crucial to note that if the SVR rises, so do your repayments, albeit at a discounted rate. This type of mortgage can be an attractive short-term option but requires awareness of potential SVR changes.

Capped rate mortgage

Capped rate mortgages promise a variable interest rate with a safety net. These mortgages set a maximum limit ('cap') on the interest rate, ensuring it won't rise above a certain level, despite SVR changes. This cap offers a blend of flexibility and security. Your rate can decrease if the SVR goes down, but won't exceed the capped rate if SVR rises, safeguarding against extreme rate hikes.

Choosing a variable rate mortgage: Factors to consider

When contemplating a variable rate mortgage, reflect on your financial resilience to rate changes. These mortgages can offer lower initial rates, but the variable nature means your monthly repayments may increase. Consider your ability to manage fluctuating monthly costs. A good understanding of market trends and interest rate forecasts can also guide your decision. Lastly, evaluate the mortgage deal's features, such as the possibility of an early repayment charge, and how they align with your long-term financial plans.

Interest only mortgage: Pay interest with different repayment strategies

Understanding interest only mortgages

Interest only mortgages involve paying interest monthly, while the principal balance remains unchanged. This mortgage type contrasts with repayment mortgages, where monthly payments cover both interest and capital. Typically, at the end of the mortgage term, you must repay the original loan in full, often through an investment, pension, savings plan, or other repayment strategy. Initially, monthly payments are lower compared to capital repayment mortgages, but it's essential to have a robust plan for repaying the loan at the term's end.

Pros and cons of interest only mortgages


Interest only mortgages offer lower monthly payments, providing immediate financial relief and flexibility. This benefit allows you to allocate funds towards other investments or financial commitments. They're particularly appealing if you expect a significant future income rise or have a clear, reliable repayment plan, such as investments or a future property sale.


These mortgages carry the risk of the capital debt remaining at the end of the term, necessitating a solid exit strategy. If your repayment plan doesn't grow as expected (e.g., if investments underperform), you might face a significant shortfall. Ensuring you have a feasible plan to pay back the loan is critical, as failure to do so can lead to loss of your home.

Interest only vs repayment mortgages: A detailed comparison

Interest only mortgages differ from repayment mortgages primarily in their structure. With repayment mortgages, you gradually reduce the capital and interest, eventually owning the property outright at the end of the term. In contrast, interest only payments cover only the interest, not reducing the principal loan amount. This setup means that at the end of the mortgage period, you still owe the original amount borrowed.

Comparatively, repayment mortgages might seem more secure as they inherently include a repayment plan. However, interest only options can suit you if you have a credible, alternative plan to accumulate the necessary funds over time. Consider your long-term financial stability, investment savvy, and risk appetite when choosing between these two types of mortgage.

Exploring other mortgage types and their unique features

Offset mortgage: Linking your savings

Offset mortgages cleverly use your savings account balance to reduce your mortgage debt. Essentially, you won't earn interest on your savings. Instead, the bank sets your savings against your mortgage loan. For example, with £20,000 in your savings and a £200,000 mortgage, you only pay interest on £180,000. This type can make a real difference in your interest payments, especially for those with substantial savings. However, their interest rates can be higher than standard mortgages. Considering your financial habits and savings size is key before choosing an offset mortgage.

95% and Help to Buy mortgages: Aiding first-time buyers

95% mortgages and Help to Buy schemes support first-time buyers in stepping onto the property ladder. A 95% mortgage covers most of your property's value, requiring just a 5% deposit. It’s a handy option if your savings are limited. Help to Buy equity loans, where the government lends you part of the purchase price, offer a similar leg up.

These options, while easing initial financial pressure, might come with higher interest rates or fees. You'll need to weigh up the upfront cost savings against potential long-term expenses.

Flexible and overpayment options: Adapting to changing finances

Flexible mortgages offer the freedom to overpay, underpay, or even take payment holidays, depending on the lender's terms. This flexibility is ideal if you anticipate fluctuations in your income. Overpayments can significantly reduce your mortgage term and total interest. But read the fine print—some lenders restrict the amount you can overpay. If you foresee an irregular income pattern or possible bonuses, flexible mortgages might align well with your financial landscape.

Buy-to-let mortgage: Investing in property

Buy-to-let mortgages are for purchasing property to rent out. Unlike standard mortgages, lenders typically base your loan amount on potential rental income rather than just your salary. This type requires typically larger deposits, and interest rates are often higher. Before diving in, ensure you've considered all costs associated with being a landlord, including property maintenance, insurance, and periods when the property might be unoccupied.

Joint and guarantor mortgages: Sharing the responsibility

Joint mortgages allow multiple parties, typically two, to share mortgage ownership. It’s a practical choice for couples or friends buying together. Your combined income can potentially increase your borrowing power.

Guarantor mortgages involve a third party, usually a family member, agreeing to cover payments if you default. This type can be a lifeline for those with limited credit history or lower income. However, it requires strong trust and understanding among all involved, as financial risks are shared.

Making an informed decision: Choosing your mortgage type

Impact of your credit history on mortgage choice

Your credit history significantly influences the mortgage deals available to you. A robust credit history typically unlocks access to a wider range of mortgages, often with more favourable interest rates.

Conversely, a chequered credit past might limit your options, nudging you towards products with higher interest rates. Lenders assess credit history to gauge the risk of lending money. Hence, before seeking a mortgage, reviewing your credit report for accuracy and improving your credit score is wise.

The role of mortgage brokers in finding the right deal

Mortgage brokers act as intermediaries, connecting you with potential lenders and deals that fit your financial profile. They're particularly useful if your situation is unique or complex. A broker can save you time by quickly identifying the most suitable mortgage deals, sometimes even those not directly available to the public. Their expertise can also clarify the intricacies of different types of mortgages, aiding you in making a well-informed choice.

Factors to consider: Interest rates, loan period, and monthly repayments

Selecting the right mortgage isn't just about finding the lowest interest rate. It's crucial to consider how the mortgage's interest rate, term, and repayment structure align with your financial goals and situation. Shorter mortgage terms generally mean higher monthly payments but lower overall interest.

Longer terms ease monthly budgets but increase the total interest paid. The type of mortgage influences your repayment strategy. For instance, repayment mortgages combine capital and interest, gradually reducing the loan, whereas interest only mortgages require a separate plan to pay off the loan.

Applying for a mortgage: Practical steps and preparation

Documentation and eligibility: What lenders look for

Mortgage lenders assess your financial stability and risk. Prepare recent bank statements, payslips, and proof of address. Consistent monthly payments and a stable income enhance your profile. Self-employed individuals need two years of accounts or tax returns.

Lenders scrutinize your spending habits and existing debts. Aim to reduce outstanding debts and avoid new loans or credit commitments before applying.

Understanding mortgage rates and fees: APR, exit fees, and more

Mortgage interest rates significantly affect monthly repayments and overall loan cost. Fixed interest rates offer predictable payments; variable rates fluctuate.

The Annual Percentage Rate (APR) includes the interest rate and additional fees, giving a truer cost measure. Understanding exit fees, valuation fees, and arrangement fees is essential. Fees can add up, impacting the affordability of your mortgage deal.

Negotiating the best mortgage deal: Tips and strategies

Start by researching the market. Compare mortgage deals from various lenders to find competitive interest rates. A mortgage broker can offer insights into deals that suit your financial circumstances. Good negotiation can secure better interest rates or lower fees. It's possible to negotiate fees and rates, especially if you have a strong credit score and substantial deposit. Don't hesitate to ask for better terms or clarity on confusing clauses in your mortgage agreement.

Conclusion: Empowering your mortgage journey

Recap of mortgage types and their suitability

Different types of mortgages cater to varied financial situations. Fixed rate mortgages promise stability in payments, making budget planning easier. If you prefer predictable monthly expenses, this type might suit you. On the other hand, tracker and variable rate mortgages offer potential savings when interest rates are low.

These are more suitable if you can handle fluctuating payments. Interest only mortgages, while lowering monthly costs, require a robust repayment plan for the capital. Your choice depends on your financial comfort and long-term goals.

Next steps: Seeking professional advice and further resources

Your mortgage decision shouldn't be solitary. Seeking advice from a mortgage broker or financial adviser can provide personalised insights. They can help match your financial situation with the right type of mortgage, considering your long-term objectives.

Additionally, exploring online resources and comparison tools can further illuminate your path. Remember, this decision shapes your financial future, so thorough research and expert advice are key in finding the mortgage that best suits your needs.

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