What Are the Different Types of Mortgages Available in the UK?

When you first dip your toe in the mortgage pool, you may be met with a slew of financial jargon: tracker mortgages, interest-only, fixed-rate, 5-year fixed rate, standard variable rate… The list goes on.

Despite all serving the same purpose (i.e. lending you money to buy a property with an interest rate that you’ll pay back over time), there are many different mortgage types available.

So before you start comparing apples to oranges, take a look at the essential information you should know about the different types of mortgages available within the UK.

Types of mortgages in the UK

In the UK, there tend to be three ways of repaying your mortgage:

• Repayment

• Interest only

• Part-and-part

Below, we’ll take a look at just some of the mortgage products available.

Repayment mortgages

Let’s begin with the most common of all: repayment mortgages. These are the base of the vast majority of mortgages on the market today and encompass many of the different types that you’ll come across.

The idea is straightforward: you receive a home loan from a lender and pay it back over a period of time (usually between 20 and 30 years, but it can be up to 40). Every month that you pay back the loan, you’ll be paying part of the capital borrowed and part of the interested attached to the loan. Once all of the capital and interest have been paid off in full, the property will be yours.

That doesn’t mean you need to buy a house and stay there for the next 20 to 40 years, however. The likelihood is that you’ll need to move house to meet your changing lifestyle needs. In this case, you can ‘port’ the mortgage (transfer it to the new property) or pay off the remaining amount from the sale and start fresh with a new mortgage on the new property.

Repayment mortgages are ideal for homeowners who want to build up equity in their property to own it outright at the end of the repayment period.

Variable-rate mortgage vs fixed-rate mortgage products

Both variable-rate and fixed-rate mortgages are repayment mortgage products, though they differ in how the interest rate is calculated.

What is a fixed-rate mortgage?

Fixed-rate mortgages are one of the most popular types of home loans in the UK, largely due to their certainty in times of uncertainty. As a repayment mortgage, the interest rate is set for a specific amount of time (say, 2, 3 or 5 years), and will remain unaffected by the Bank of England (BoE) base rate increases or market fluctuations. Once you take out the fixed-rate mortgage, you’re locked into that interest rate for a certain period. If you leave before the end of the period, you may have to pay exit fees.

In this fixed-rate period – also called the initial rate period – you know exactly how much you must pay every month. This amount remains unchanged (unless you decide to overpay on your mortgage) until the fixed term is over. The major benefit to a fixed-rate mortgage is that you know exactly how much is going to come out of your account each month, so you can plan other expenses around it. These mortgages are favoured by first-time buyers who prefer to have a fixed expense during the first years of homeownership to keep their budget on course.

Because the interest rate remains fixed for the term, you won’t benefit from a decrease in interest rates during that period. However, you are protected from increasing rates. If it looks like the base rate is going to increase soon or you value consistency and stability, a fixed-rate mortgage might be for you.

Once your initial period ends, you’ll automatically be switched over to the lender’s standard variable rate, which is often at a higher rate. Many homeowners choose to remortgage at this point so they can lock in another better deal – and save hundreds of pounds.

What is a variable-rate mortgage?

Differing from its fixed-rate counterpart, the interest rates for variable-rate mortgages can and do change at any time, either increasing or decreasing. The amount you pay for your mortgage every month will fluctuate to accommodate the Bank of England’s changing base rate.

To suit your financial needs, there are different types of variable-rate mortgages, where the interest rate is calculated differently.

• Standard variable-rate mortgage

• Tracker mortgage

• Capped rate mortgage

• Discount rate mortgage

Standard variable rate mortgage

The standard variable rate (SVR) is the basic rate your mortgage lender charges. The lender sets the interest rate, which may not be linked directly to the BoE base rate. Your lender can increase or decrease your rate whenever they choose. For many, the interest rate remains high, and it can be difficult to budget since your monthly payments are subject to change. Many mortgage advisors will suggest finding a better mortgage deal instead of staying on your lenders SVR to avoid paying over the odds in interest. You can leave this mortgage without being penalised.

Tracker mortgage

These mortgages follow a designated interest rate by a set amount, either above or below the chosen rate of interest. They tend to follow the BoE base rate, which means if the base rate increases, you can expect your payments to soar upwards, though if interest rates fall, your mortgage payment will follow suit too.

One aspect to be aware of with tracker mortgages is that the lenders often put in a stipulation: that the loan cannot drop below a certain rate, regardless of what the BoE does, while there is no cap on the upper end. That means that you don’t have protection against your repayments going through the roof.

Capped rate mortgage

If the last sentence above made you shudder, then a capped-rate mortgage could be the ticket. Here, the interest rate is capped, meaning it won’t rise above the stipulated amount given when you take out the mortgage, but you could benefit if the interest rates fall. These mortgage deals are commonly available as a standard variable-rate mortgage or in tracker mortgages, which follow their own model but with a built-in cap. Keep in mind that these mortgages protect you from high rates, but also don’t offer the full benefit of lower rates.

Interest-only mortgage

With an interest-only mortgage, you only pay the interest on the mortgage amount each month, and don’t repay the capital you’ve borrowed. Instead, the loan is paid back at the end of the mortgage term – which means the buyer needs to be sure they have the funds to pay off the whole debt.

Part and part mortgage

A part and part mortgage – also known as a part repayment and part interest mortgage – allows you to pay just a portion, rather than all, of your mortgage loan back through monthly repayments. This would leave a smaller balance to be settled up at the end of the term.

The main advantage of an interest-only mortgage is that the monthly repayments are much lower than most other mortgage products. The downside is that you’ll need to have the money to repay the debt at the end of the term (and the lender will want to see you have plans in place for this), or you may have to sell the property to cover the amount.

This differs from a repayment mortgage, where the amount is paid back alongside the interest each month.

Discount rate mortgage

This type of mortgage offers a discount off the lender’s standard variable rate (SVR). It tends to be a rate you move onto once your fixed, tracked, discounted or other type of mortgage deal ends.

As with a tracker mortgage, a discounted mortgage is a variable rate deal. This is because the SVR can fluctuate in line with the interest rates – or whenever the lender decides. The amount you pay will vary from month to month, so there is some risk attached to this type of mortgage.

What’s the most popular type of mortgage in the UK?

The most popular type of mortgage in the UK tends to be a fixed-rate mortgage, especially for first-time buyers. These mortgages give some stability and consistency when budgeting finances as you have the same interest rate and payment for a set period of time. Following the initial deal period, the mortgage will switch to the lender’s standard variable rate, which is often higher.

While there is no ‘one size fits all’ mortgage, you can work with an expert mortgage advisor who will scour the market for you, finding the right mortgage deal to suit your needs.

How to find the right mortgage for you

If you’re unsure of where to begin, allow the team at Purplebricks Mortgages to help. After an initial call where they get to know what you want (and there’s no problem if you don’t know what you’re after just yet!), they’ll get looking for a solution. With access to over 12,000 deals, your own dedicated advisor will compare the top deals that suit your budget and situation. They’ll be on hand to answer questions, chase deals and will help you navigate the choppy waters of mortgages.

To get started, simply request a call back, and we’ll be in touch soon.

What’s the right mortgage for you?

With so many different mortgages on the market, deciding what’s best for you can be challenging. It will largely depend on your circumstances, how they change over time, and your goals. 

With our mortgage experts, you can expect access to attractive mortgage deals, along with top-tier customer service. Our advisors are human, and they’ll always give you a human answer. Ready to offer advice on the mortgage to suit your needs, get in touch with our advisors today.