Different Types of Mortgages

Understanding the Different Types of Mortgages

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If you’re new to the world of homeownership or an experienced property owner looking into alternative mortgages from what you currently have, the different types of mortgages can be a little tricky to navigate. We’re here to break down the different types of mortgages available in the UK so you are better placed to make a decision when you find that dream home.

The Difference between Repayment vs. Interest-Only

The first thing to understand when it comes to mortgages is deciding between repayment options versus interest-only. A repayment mortgage requires you to steadily pay back the money you borrowed along with the interest on whatever capital you still owe. 

By comparison, interest-only mortgages require you to only pay the interest on a mortgage over the term agreed with the capital amount paid in full at the end of your mortgage term. 

Fixed-Rate Mortgages

With that in mind, we’ll look at the main types of mortgages, fixed-rate and variable. Fixed-rate mortgages have become much more popular in the wake of 2019/2020’s volatility. The ‘fixed-rate’ refers to the interest paid on your mortgage over an agreed period. Your lender guarantees the interest rate for a set period.

This is popular with homeowners as they don’t need to worry about the market fluctuating and potentially increasing their repayments. It’s important to note that if you choose to go with a fixed-rate mortgage and interest rates drop, you may end up paying more than variable rates so there is an element of risk, even in fixed-rate mortgages.

A fixed-rate mortgage can differ with some mortgages offering a fixed rate over 2-5 years before reverting to standard variable rates, while other mortgages offer fixed rates over the entire term of the mortgage.

Variable Rate Mortgages

Variable-rate mortgages have interest rates that shift according to the standard variable rate (SVR) or other variable measures. This means that your repayments can go up or down depending on the Bank of England or lender changes. Here are some of the variable rates mortgages you may have available.

Standard Variable Rate (SVR)

SVR is your lender’s default interest rate. This rate is determined by the lender and they are free to adjust it how and when they like. This rate usually comes into play after a fixed term or another variable measure has ended. For example, you may find a fixed-rate mortgage that offers a fixed rate over the first 5 years before reverting to SVR for the rest of the mortgage term. As a result, most people view the SVR as the ‘default’ interest rate. 

Tracker Mortgages

Tracker mortgages are variable rate mortgages that are informed by the Bank of England interest rate. So for example, if your base interest rate is 2.5% and the Bank of England’s base rate is 0.2% then your interest rate would be 2.7%. A tracker mortgage is usually in place for a fixed number of years before reverting to the lender’s SVR.

Capped Rate Mortgages

A capped rate mortgage is a variable mortgage with a hard limit on the maximum interest you will pay. This form of mortgage is popular as it offers the flexibility of a variable rate mortgage (so you pay less if interests go down) while at the same time ensuring your rate never goes above a set percentage. For example, you have a capped rate of 4% which means that even if the Bank of England increases its base rate drastically, your rate will never go above 4%.

Discounted Rate Mortgages

A discounted rate mortgage is offered by lenders who promote a discount on their SVR. So for example, your lender may offer their SVR minus a percentage for a fixed time. 

So if your lender’s SVR is 3.5% and they offer a 1.5% discount on the first six months (resulting in a 2% rate over the period), a 1% discount on the following six months (resulting in a 2.5% rate over the period), and then reverting to the SVR for the rest of the mortgage term. Some lenders will also add an upper or lower limit to a discounted rate mortgage known as a ‘collar’. 

Flexible Mortgages

A flexible mortgage trades a higher interest rate for flexible repayments. These mortgages allow homeowners to pay more or less than the agreed-upon repayment structure and potentially even take payment holidays. However, for this privilege, you may pay a much higher interest rate to protect the lender’s investment. 

Offset Mortgages

An offset mortgage is a unique mortgage that allows you to add your capital to reduce the interest you pay. For example, if you take a £150,000 offset mortgage and link a savings account with £10,000 in it you will only pay interest on £140,000. This mortgage is great if you have a little nest egg to use as a promise you will repay the full amount while paying less in interest as a result.

My Mortgage Pro

At My Mortgage Pro, we help people from all walks of life find the funding to own their dream home. We are expert mortgage advisors with years of experience. Our recommendations are authorised and regulated by the Financial Conduct Authority and we are pleased to provide our clients with tailored advice unique to their needs.

Our team pride themselves on providing you with simple, jargon-free information about mortgages to help you find the best mortgage for your budget and needs. If you need a mortgage contact us now for a free initial chat and we’ll help you find competitive mortgages from certified mortgage providers.