Types of Mortgages

Especially if you’re new to the property ladder, it’s likely you have lots of questions about how to get a mortgage and which type suits you best. From fixed-rate mortgages to trackers and everything in between, it can be difficult to know where to start.

The good news is we can help you understand the difference between the various mortgage types, and help you secure a deal that fits your circumstances. Here are some of the main mortgage types and ways to repay that you might want to consider:

Fixed-rate mortgages

A fixed-rate mortgage is a type of home loan agreement where the interest rate remains the same throughout the term of the loan. This means that the lender’s monthly principal and interest payments remain the same, providing homeowners with stability and predictability.

In most cases, fixed-rate mortgages are offered in 15, 20 or 30-year terms. Due to the fact that the rate doesn’t change, homeowners are protected from interest rate increases in the market. However, you may find that rates can be higher than those of variable rate mortgages.

Fixed-rate mortgages are ideal for those who plan to stay in their home long-term and want consistently manageable monthly payments.

Tracker mortgage

Unlike a fixed-rate mortgage, a tracker mortgage has a variable interest rate. In most cases,  this means that the interest will rise and fall in line with the Bank of England’s base rate for a certain period of time – this is usually two or five years. After this period of time, the mortgage will then revert to the lender’s standard variable rate.

If the base rate drops, your monthly mortgage payments will drop. This can mean that you may be able to overpay on your mortgage, which as a result could mean that you pay off your mortgage quicker.

However, if the tracker rate goes up, you will continue to repay the same amount as before, which could mean that it takes longer to pay off your mortgage.

Discounted mortgage

A discounted mortgage is a variable rate mortgage where the interest rate is set at a discount below the lender’s standard variable rate (SVR). This is fixed for a determined period of time, which is usually between two and five years. This type of mortgage means that borrowers pay a lower interest rate at first, which in turn makes repayments more affordable.

However, since the rate of the mortgage is linked to the SVR, it is possible for the monthly repayments to fluctuate if the SVR changes. It’s also important to note that once the discount period ends, the mortgage will return to the full SVR.

A discounted mortgage is a good fit for those looking for lower initial repayments – but it does also mean there is a risk of increased costs later on.

Capped-rate mortgage

A capped-rate mortgage is a variable rate mortgage where the interest rate can go up and down, but it will not rise above an agreed upper limit – this is known as the cap. This type of mortgage means borrowers have protection against significant interest rate increases but still benefit from possible rate decreases.

The cap is usually fixed between two and five years. Although the monthly payments can vary, the cap ensures that these repayments don’t exceed a certain amount.

Capped-rate mortgages provide homeowners with some level of security and flexibility, making them an attractive option to borrowers who want a variable rate mortgage with some built-in protection.

Current account mortgage

A current account mortgage combines a mortgage with a current account, allowing borrowers to balance their savings and income against the mortgage balance. All money, including salary and savings, is paid into one account linked to the mortgage. The interest is then calculated on the net balance, which reduces the overall interest paid and possibly shortens the mortgage term.

This type of mortgage may be best suited to those who are able to manage their finances well and want to reduce the interest to repay more quickly.

Offset mortgage

Unlike a current account mortgage, an offset mortgage means that your money, such as your current account and savings, are kept in separate accounts to your mortgage. However, the balances are ‘offset’ against your mortgage when it comes to calculating interest.

The money you have in savings isn’t used to pay off your mortgage – it is used to lower the total interest you will be charged each month. Your lender will then ‘take away’ the amount in your savings account from the amount you owe on your mortgage, and you’ll pay interest on what’s left. This means that you pay less interest compared to if you had a repayment mortgage.

High LTV mortgage 

A high LTV mortgage is a home loan where the borrower puts down a small deposit – typically 5% to 10% of the property’s value – then borrows the remaining percentage from the lender. This type of mortgage is popular with first time buyers as it means not having to save a large deposit.

Although this type or mortgage can make owning a home more accessible, high LTV mortgages usually have higher interest rates. This is due to there being an increased financial risk for lenders. It’s also not unusual for some lenders to request guarantors or additional eligibility criteria.

There may be government schemes available to support first time buyers in securing high LTV mortgages with more desirable terms.

For more information, check out our mortgages FAQ page.