Types of mortgage

There are two main types of mortgages: fixed rate mortgages and variable rate mortgages. Our comprehensive guide will explain the various mortgages available, to help you work out which one works best for you.

In this article:

Fixed rate mortgage

What is a fixed rate mortgage? With this type of mortgage, your monthly payments stay the same for a pre-agreed time period, usually between two and five years. During your fixed term you’ll be protected from interest rises, but you also won’t benefit if rates go down.

Once this period is over, your mortgage will automatically switch to the lender’s standard variable rate (SVR), which could lead to higher or lower monthly payments, depending on the market conditions. To avoid potential increases in your repayment, you might consider remortgaging to a new deal before your fixed term ends.

Find out more about the options you’ll have at the end of your fixed term mortgage.

Variable rate mortgage

What is a variable rate mortgage? With this type of mortgage, the interest rate goes up or down. The rate is often linked to the Bank of England’s base rate, but it can also be influenced by other factors determined by your lender, including regulatory changes and market conditions. This means that if interest rates rise, your mortgage payments could increase, and if rates fall, your payments might decrease. There are several categories of variable rate mortgage, such as tracker mortgages and discounted mortgages, which are covered below.

Tracker mortgage

A tracker mortgage is a type of variable rate mortgage which follows or ‘tracks’ the Bank of England base rate, plus a percentage determined by your lender. Therefore, if the base rate goes down, so do your repayments, but they will go up if the base rate does.

For example, if the base rate is 1% and your tracker mortgage is set at base rate plus 1%, your interest rate would be 2%. If the base rate increases to 1.5%, your interest rate would rise to 2.5%, resulting in higher monthly payments.

Many types of tracker mortgage have a ‘collar’, which means there’s always a minimum amount you have to pay, no matter the base rate. This means there's a floor to how much you can benefit from rate decreases. Similarly, some deals might have a ‘cap’, which limits how high your interest rate can rise, providing some protection against significant rate increases.

Discounted mortgage

With a discounted mortgage, your lender will give you a discount on its standard variable rate (SVR) for a fixed time period, typically lasting between two and five years. This means you’ll benefit from lower interest rates during the discount period. For example, if the SVR is 5.5% and your deal offers you a discount of 2%, you’ll pay an interest rate of 3.5%.

However, because your rate is linked to the lender's SVR, your repayments can change over time. As with all variable rate mortgages, if your lender’s SVR goes up, so will your repayments, and if it goes down, your repayments will too. It's important to note that the SVR can change at your lender's discretion and isn't solely tied to the Bank of England's base rate. This means your repayments could fluctuate even if general market rates remain stable.

Before you choose a variable rate mortgage, you need to consider whether you could afford higher payments if interest rates were to rise. Always check the terms and conditions, as some variable rate mortgages may come with early repayment charges or restrictions on overpayments.

Interest-only mortgage

With an interest-only mortgage, you only pay the interest charges on your mortgage each month. This keeps your payments lower, but it does mean you won’t be paying off any of the principal, or the original amount of money you borrowed.

After the financial crisis of 2008, it’s much more difficult to get this type of mortgage. Lenders now have stricter criteria, often requiring a significant deposit, higher income, and evidence of a solid repayment plan. Despite this, interest-only mortgages remain popular for buy-to-let properties, where landlords might rely on rental income or the future sale of the property to repay the loan.

Interest-only mortgages can be appealing due to their lower monthly payments, but they come with increased risk, since you're not reducing the loan balance over time. It's important to carefully consider whether this type of mortgage suits your financial situation and long-term goals.

Find out more about how the mortgage process works from start to finish.

Repayment mortgages

Repayment mortgages allow you to pay off a chunk of the capital – the amount you borrowed – each month, as well as the interest. This means you’ll have paid your entire loan in full by the end of the mortgage term, usually 25 years.

Initially with a repayment mortgage, more of your monthly payment will go towards the interest and less towards the loan. That’s because interest charges are higher when the outstanding loan balance is larger. But as you make your payments over time, the amount you owe decreases. This means the interest portion of your payment gets smaller, and more of your money goes toward reducing the remaining loan balance. You'll start to see this shift as you progress, eventually paying more of the loan and less in interest. This gradual change helps you build equity in your home more quickly. Repayment mortgages are the most common type for residential properties because they provide a clear path to owning your home outright. They also reduce the risk to both you and the lender over time, as the outstanding debt decreases with each payment.

Applying for a mortgage? Find out the application steps you need to follow. 

Joint mortgages

A joint mortgage is a loan shared between two or more people wishing to buy a property together –  usually couples, but also friends or family members. By combining your incomes, you might be able to borrow more than you could individually, allowing you to purchase a property that might otherwise be out of reach.

But remember, all parties are responsible for making the mortgage payments and are jointly liable for the debt. If one person can't pay their share, the others must cover the full repayment, so it's important to consider this commitment carefully.

There are two ways you can structure ownership with a joint mortgage:

Before entering into a joint mortgage, make sure you have clear agreements in place. Think how changes in circumstances, like a relationship breakdown or financial fluctuations, could impact your mortgage and property ownership. Seeking legal advice and drawing up documents like a Cohabitation Agreement or Deed of Trust can help protect everyone's interests.

Find out more about joint property ownership.

Specialist mortgages

Sometimes, the standard mortgage options just don't fit everyone's unique situation. That's where specialist mortgages come in – they're designed to meet specific needs that aren't covered by typical mortgages. These are ideal for people who might not meet the usual lending criteria.

Maybe you're self-employed with an irregular income, or perhaps you've had some credit issues in the past. You might be looking to invest in a buy-to-let property, purchase a non-standard home, or be an older borrower interested in releasing equity from your property. In these cases, a specialist mortgage could be the solution you're looking for.

Examples of specialist mortgages include:

Specialist mortgages often come with different terms or requirements, such as higher interest rates or larger deposits. If you have unique circumstances or needs, a specialist mortgage might be suitable. It's a good idea to chat with a mortgage advisor who can help you find the right product for your situation.

How to choose the right mortgage for you

Deciding on the best mortgage option can feel overwhelming, but breaking it down into key considerations can help make the process smoother. Here's what you might want to think about:

Should you get a fixed or variable rate mortgage?

There are pros and cons for each type of mortgage and the best choice depends on your personal circumstances and financial goals.

Fixed rate mortgages offer stability and predictability. Knowing exactly how much you’ll pay each month makes it easier to budget, and offers peace of mind throughout the fixed term. However, you won’t benefit if interest rates fall, as you would with a variable rate. You could also incur penalties if you move home before the end of your fixed term, and the need to remortgage when your fixed term ends can be a hassle .

Some lenders allow you to port your mortgage – transfer it to a new property – to avoid these charges when moving within your term. Porting can help you avoid early repayment charges, but it often requires reapplying and meeting the lender's current criteria, which may have changed since your original application.

Variable rate mortgages offer more flexibility, typically don't have early repayment charges, so you may move home or make extra payments without facing penalties. If interest rates decrease, your monthly payments could go down, potentially saving you money.  However, if interest rates rise, your payments could increase, which can make budgeting more challenging. Variable rates can be unpredictable, so you need to consider whether you'd be comfortable with potential fluctuations in your monthly payments.

Credit scores are an important part of a mortgage lender’s decision process. Read our guide to improving your credit score.

Assess your financial situation

Consider how stable your income is. If you have a steady job with predictable earnings, you might be comfortable with a variable rate mortgage.  But if your income varies or you're keen on knowing exactly what you'll be paying each month, a fixed rate mortgage could give you that peace of mind.

Look at your current expenses and determine how much you can afford to pay each month. Don't forget to factor in other costs of home ownership like insurance, maintenance, and taxes.

Having a financial cushion can help if interest rates rise or unexpected expenses come up. This might influence your ability to handle variable payments.

Think about your future plans

Next, reflect on your future plans.  If you plan to stay in your home for a long time, a fixed rate mortgage might be beneficial to lock in a good rate. If you think you might move in a few years, a variable rate mortgage with no early repayment charges could offer more flexibility.

If you expect your income to increase, you might opt for a mortgage that allows overpayments without penalties, helping you pay off your mortgage faster.

Consider how you feel about risk

Are you comfortable with the possibility that your mortgage payments could increase? If so, a variable or tracker mortgage might be suitable. If not, a fixed rate mortgage could offer the security you need.

While no one can predict interest rates perfectly, staying informed about economic trends can help you make a more confident decision. Keep an eye on financial news and consider how potential rate changes could impact your mortgage.

Get professional advice

Talking to a mortgage advisor can provide personalised guidance based on your unique situation and help you navigate the various options. They can explain the nuances of different mortgage types, help you understand the fees involved, and assist in finding the best deals.

Read the fine print

Be aware of any extra costs, such as arrangement fees, valuation fees, or early repayment charges, which could affect the overall cost of your mortgage. Make sure you're clear on any restrictions, like limits on overpayments or requirements for specific types of insurance.

Understanding all the terms and conditions will help you avoid any surprises down the line and ensure that the mortgage you choose truly fits your needs.

Plan for future changes

Consider how future changes might affect your mortgage:

Interest rate fluctuations: Think about how changes in the economy could impact your mortgage payments, especially with variable rate mortgages.

Life events: Marriage, children, or job changes can affect your financial situation. Consider a mortgage that offers flexibility if you anticipate significant life changes.

Learn more about mortgages and where to start when thinking about applying for one.