What types of mortgage are available?
When choosing a mortgage, it’s normal to focus on interest and any fees you’ll be charged. But it’s also important to consider which types of mortgage are available and which is most suitable for you. There are a wide variety of different mortgages so it’s not always easy to know which one to choose. Our guide will go through each type of mortgage and look at the pros and cons of each one.
In This Guide:
- Fixed rate mortgage
- Variable rate mortgage
- Discount mortgage
- Tracker mortgages
- Capital repayment mortgage
- Offset mortgages
- Family assisted mortgages
- Help to buy
- Which mortgage is right for me?
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 always only for a limited period meaning at the end of that period you will be switched to a higher rate of interest and therefore be paying more in monthly repayments. It’s common for those on a fixed rate mortgage to look to re-mortgage just before the end of your fixed term period to stop you being moved onto your lenders standard variable rate.
Having a fixed rate means even if your provider changes the standard variable rate, which longer term customers will have to pay, you will still receive the original rate you signed up to. 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 lenders interest rate. The disadvantage is your interest is not guaranteed and could 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 in which you pay the combined cost of monthly mortgage payments plus interest every month. The interest rate of this mortgage can be fixed, variable or tracked.
An advantage of this type of mortgage is that you can reduce how much you have to pay each month by ‘overpaying’ on your payments, meaning you will owe less and will therefore pay less interest. There are usually limits on how much you can repay, which, if you exceed 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 would use your savings to overpay on your mortgage. By doing this you would be reducing the amount you owe and therefore the total interest you pay on your mortgage instead of gaining interest in your savings account.
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 who’s monthly income varies.
Before deciding whether this type of mortgage would work for you it’s important to compare the interest rate you would get in a savings account to the interest 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 will usually pay more interest on this kind of mortgage, but it may be a suitable option for those without enough for a deposit or who have not been approved for another kind of mortgage. If your family or friend has a strong financial history and a good credit score, then this will greatly increase the likelihood of you being accepted for a mortgage.
Help to buy
The UK government’s Help to Buy scheme seeks to help first time buyers by encouraging lenders to approve their applications by guaranteeing a percentage of the mortgage. This is guaranteed by an ‘equity loan’ and is up to 20% outside of London and 40% inside London.
Which mortgage is right for me?
Deciding which mortgage is right for you will depend on several factors such as your employment status, your current savings, the property price and how much you already have saved for a deposit, amongst other things.