Fixed-rate mortgage
A fixed-rate mortgage means that the interest rate set at the outset of your mortgage will stay the same for a set period, usually between two to five years. Fixed rates are only for a limited period, meaning at the end of that period, you'll be switched to a higher interest rate and pay more in monthly repayments. It’s common for those with a fixed-rate mortgage to remortgage just before the end of the fixed term to avoid being moved to the lender's standard variable rate.
A fixed rate means that even if your provider changes the standard variable rate, you will still pay the original rate you signed up for, unlike long-term customers who will have to pay the new rate. You can manage your budget more easily knowing how much you will have to pay each month. However, interest rates may fall during your fixed-rate period, but you will be unable to benefit and may end up paying more than other customers.
Variable-rate mortgage
Mortgage interest rates are usually variable, meaning that there is no guarantee the mortgage rate you signed up to at the beginning of the deal will stay the same.
Without a fixed-rate deal, it’s almost guaranteed that your interest rate will change multiple times during your mortgage. Interest rates are set by the Bank of England and are affected by changes in the market.
Discount mortgage
A discount mortgage means you will have a discount off the lenders standard rate for a set period of time, usually between two and four years. When considering this kind of mortgage you need to consider both the amount discounted and the interest rate offered by that lender.
The advantage with this deal is that you will pay a lower rate at the beginning of the deal and you can still benefit from cuts to your lender's interest rate. The disadvantage is that your interest rate is not guaranteed and can change at any time.
Tracker mortgages
A tracker mortgage is another type of variable-rate mortgage where the interest rate changes based on the Bank of England’s interest rate.
Capital repayment mortgage
This is the most common type of mortgage, where you pay both principal and interest every month. The interest rate of this mortgage can be fixed, variable or tracked.
An advantage is that you can reduce your monthly payments by overpaying, meaning you’ll owe less and pay less interest. There are usually limits on how much you can repay, which, if exceeded, can lead to penalty 'early repayment' charges. Find out more about mortgage overpayments.
Offset mortgages
Offset mortgages involve using your savings account to 'offset' the cost of your mortgage. Under this arrangement, you use your savings to overpay on your mortgage. This reduces the amount you owe and the interest you pay on your mortgage, instead of earning interest on your savings.
The difference between overpaying under a capital repayment mortgage and overpaying with an offset mortgage is that you can get money back if needed. Typically, under a capital repayment mortgage, once you make an overpayment, you can’t get that money back from the lender. This extra flexibility makes this a good option for those whose monthly income varies.
Before deciding whether this type of mortgage would work for you, it’s important to compare the interest rate on a savings account with the rate on your mortgage. For instance, keeping the money in a savings account with 6% interest would be a better choice than using your savings to pay off a mortgage with only 3% interest.
Family assisted mortgages
If you’re struggling to find the money for a deposit, a family-assisted mortgage may work for you. With this type of mortgage, you will get a friend or family member to loan you a deposit or use their savings as a guarantee on your mortgage.
You’ll usually pay more interest with this mortgage, but it may be suitable for those who can’t afford a deposit or have not been approved for another type of mortgage. If your family member or friend has a strong financial history and good credit, it will increase your chances of being accepted for a mortgage.
Help to buy
The UK government’s Help to Buy scheme helps first-time buyers by encouraging lenders to approve their applications, guaranteeing a percentage of the mortgage. This is guaranteed by an equity loan, up to 20% outside of London and 40% inside London.
Which mortgage is right for me?
Deciding which mortgage is right for you depends on factors such as your employment status, current savings, property price, and how much you’ve already saved for a deposit.