According to the Bank of England, 70% of owner-occupier borrowers will experience increases in their monthly payments by the end of 2025.
This makes the decision to get a mortgage even more stressful than before — so before you choose, learn all you can about mortgages and how they work.
Shop around, research, and find a regulated mortgage broker so you don’t pay more than you need to. In this article, we will go through different types of mortgages and explain how to get the best rates.
The two basic repayment models are repayment (capital+interest) and interest-only.
The second major division concerns the interest rate: fixed (unchanging) vs variable (changing).
Variable mortgages are tracker, discount, capped-rate, and SVR.
Specialist mortgages include offset, flexible, small/zero deposit, buy-to-let, joint, JBSP, and guarantor mortgages.
Mortgages by Repayment Models
Interest-Only Mortgage vs Repayment Mortgage
With any types of mortgage, you’re essentially repaying two parts of it: the capital (the actual amount borrowed) and the interest. There are two basic ways to repay these parts:
With interest-only, your monthly payments only cover the interest, and you pay the capital in one lump sum at the end of the term (usually by selling a property or through savings).
With repayment mortgages, your monthly repayments include both the capital and the interest so you repay everything by the end of the term through your monthly instalments.
While most mortgages on the UK market currently fall within the repayment category, the highest rates since 2008 are fueling curiosity about interest-only mortgages.
So let’s get into both in detail.
Repayment mortgages
Repayment mortgages are straightforward – your monthly repayments go towards covering both the capital and the interest, and after an agreed number of years (the mortgage term), your mortgage is fully paid and you own your property.
Interest rates are typically lower compared to interest-only, while monthly repayments will be higher. The mortgage term is usually 25 years. However, due to the way interest is compounded, longer terms come with more interest paid, even though they cost less per month.
Tip: As a rule, a bigger deposit will mean a better deal and a cheaper mortgage in general. If you’re struggling with savings, and think an extra 25% from the government could help, find out more about LISAs.
- Cost less overall
- Monthly repayment gets smaller with time
- You own your home at the end of the mortgage term
- Higher monthly payments
- You mainly pay for interest in the early years
- Less flexibility
Interest-only mortgages
Another way to pay for a mortgage is the interest-only model. In this case, you pay for interest only each month during the agreed mortgage term, and after that, you repay the entire sum you borrowed in one single payment.
The interest rates for-interest only mortgages are typically higher, although monthly repayments are lower as they do not go towards repaying the actual money you borrowed.
Instead, you repay it by remortgaging, selling the property, or using your savings and investments. You will need to provide the lender with your repayment strategy as you apply for an interest-only loan.
- Lower monthly payments
- More control over your investments as you choose your way of repaying the initial sum
- Shorter terms (also available for people later in life)
- More risk involved if you have no way to repay in the end
- More expensive overall
- Higher interest rates
- You don’t own your home until you repay at term-end
- Interest doesn’t get lower with time
Mortgages by Rates
Variable-Rate Mortgages vs Fixed-Rate Mortgage
The difference between variable-rate and fixed-rate deal is simple. With fixed-rate mortgages, the interest rate doesn't change during the agreed-upon period. With variable-rate, the interest rate can increase or decrease.
Fixed-rate mortgages
Fixed-rate mortgages have rates that stay the same for a set period of time. Usually, these terms last from two to five years, but there are also longer terms of ten years and more. In the UK, most outstanding mortgages are fixed to five years.
So if you have a five-year mortgage, your rate is locked in for five years, after which you are moved to the lender’s standard variable rate (usually until you strike a new deal).
If you want to switch from a variable to a fixed-rate mortgage, you can technically do so at any time. However, this would require a full remortgage with the current or a new lender, which could come with significant fees if you are still in the introductory or discounted period.
When it comes to interest rates, a longer fixed rate period proves to be more expensive than short periods. Also, fixed-rate deals tend to have higher rates than variable-rate deals, although not as high as SVRs.
- More predictable, lets you budget
- Locking in when rates are low
- Staying safe when the bank rate rises
- Leaving a fixer comes with high penalties (e.g. to move or repay early)
- Your rate stays the same even if the bank rate falls
- Higher arrangement charges
As of July 2023, the average two-year fixer rate was 6.51%, while the average rate for a five-year fixer was 6.02%, according to Moneyfacts.
Variable rate mortgages
A variable rate mortgage is a type of mortgage in which your interest rate, and as a result, your monthly repayments, can increase or decrease. Your interest rate can change at the lender’s discretion, usually (but not always) following changes to the BoE bank rate.
Variable-rate mortgages usually have introductory periods during which there are special conditions: discounts, tracker rates, or capped rates. These can last between one and five years, depending on the subtype of variable mortgage.
Although they can have lower starting rates than fixed-rate mortgages, the rates tend to go up later. Essentially, they depend on the state of the market and economy.
- Usually no early repayment charges
- Lower initial rates
- Lower rates if interest rates decrease
- Usually lower arrangement fees
- More flexibility with overpayments
- Lender can raise the rate anytime
- Higher rate if interest rates rise
- Budgeting is harder
- SVRs tend to be expensive
Variable rate mortgages come in several subtypes –SVRs, tracker mortgages, discount mortgages, and capped-rate mortgages.
Standard variable rate (SVR) mortgage
The standard variable rate mortgage is the mortgage deal you end up on after your introductory period is over. This rate is typically quite high, so people usually remortgage or find a new deal once they’re moved onto the SVR. An SVR does offer full flexibility, so you can overpay or switch to other deals with no penalties whatsoever.
Tracker mortgage
The rate for a tracker mortgage is determined by adding a pre-arranged percentage on top of another interest rate (usually BoE base rate). This in turn affects your monthly repayments. Some tracker mortgages also have an interest rate collar, which is the minimum rate the lender will offer even if the bank rate drops.
Tip: If you think the base rate will continue to rise, you can fix your tracker mortgage. However, consider early repayment fees if you fix it for a longer time and happen to move while the fix still lasts.
Discount mortgage
A discount mortgage is just like an SVR but with a discount that lasts for a set period, usually two to five years, with some lenders offering up to ten. To determine the rate, check your lender’s SVR.
Capped-rate mortgages
Capped-rate mortgages have a limit which the interest rate cannot exceed during the arranged period, regardless of what happens with the lender’s SVR. You will know that your monthly repayments cannot go over the maximum, and if the SVR goes down, you can see the rate dropping, too. Capped-rate mortgage terms last between two and five years, after which you’ll be moved to the SVR.
Specialist Mortgages
There are also specialist mortgages intended for people with specific needs, from landlords to people with no deposit, or people who need support from family or friends to get a mortgage.
For those with large savings: Offset mortgage
Offset mortgages are a type of mortgage connected to your savings account. The money in the account is used to offset the amount on which you pay interest. For example, if you need a loan of £200,000, and you have £20,000 in your savings account, you will only pay interest on £180,000. You can still use the money in your savings account, but this will affect your interest.
The maximum LTV tends to be lower at about 80% maximum. However, offset mortgages are harder to find and come with higher interest rates. You can also find family offset mortgages and buy-to-let offset mortgages.
For those with small deposits: 95% or 100% mortgage
If you only have a deposit of 5% of the property value or no deposit, repayment mortgages with an LTV ratio of 95% to 100% present an opportunity. They are intended for first time buyers, but other people can get them too. They are, however, riskier and have higher interest rates than mortgages with bigger deposits, even if it’s just 10%.
Zero-deposit mortgages are not easy to find and have strict affordability rules. However, they can still be found among guarantor mortgages, family deposit mortgages, and student mortgages.
For those who require room for manoeuvre: Flexible mortgage
Flexible mortgages provide more options for easier switching between deals, overpayment, underpayment, daily interest calculations, and even mortgage payment holidays, during which you can pause your payments (although the interest is still charged). Due to this, they are sometimes referred to as mortgages with no early repayment charges.
Flexible mortgages might suit borrowers with a fluctuating income: those who are self-employed, on zero-hour contracts, a commission-based income, or large bonuses they would like to use to overpay. However, the flexibility is usually paid through higher setup fees or interest rates.
For aspiring landlords: Buy-to-let mortgage
A buy-to-let mortgage is a type of mortgage intended for buying rental properties and repaying through rental income (affordability calculations include other types of income, too). It usually requires higher deposits (at least 25%), and comes with higher interest rates, and setup fees.
BTL mortgages are available as interest-only and repayment mortgages and are not designed for people with lower credit scores or income. With lenders being extra cautious, BTL options for first-time buyers are often limited.
For couples, friends, and partners in crime: Joint mortgage
Joint mortgages can be taken by two to four people who are all responsible for payments and are usually taken by partners. The joint borrowers become financially linked, affecting one another’s credit scores.
Given that people can join forces to get a bigger deposit, they can get a better LTV ratio and therefore better interest rates. Moreover, joint borrowers can usually get bigger loans as lenders take the combined income into account.
For those helping loved ones up on the housing ladder: JBSP mortgage
There is another type of mortgage: joint borrower, sole proprietor mortgages, where more people make the monthly payments, but only one owns the property in the end. A JBSP mortgage usually helps first-time buyers get better deals and borrow more money as the other borrower typically has a better credit score and higher income.
These are typically repayment mortgages. However, they are difficult to come by and it’s best to use a specialist broker.
For those who need some support: A guarantor mortgage
A guarantor mortgage allows people with poor credit scores, no credit history, or with issues to save enough for a deposit to get a mortgage. A guarantor helps them by providing additional security, whether it’s savings, income or property.
A guarantor doesn’t make monthly payments unless the borrower isn’t able to. Unlike with a joint mortgage, they have no property rights. These are repayment mortgages.
So, which type of mortgage is best?
The best mortgage for you depends on your plans, deposit, income, and general eligibility. Here’s a table that compares all of them:
Best for | LTV ratio | Interest rates | |
---|---|---|---|
Standard residential | Buying a home | Up to 90% | Depending on the lender |
JBSP | No credit history, first-time buyers, students | Up to 100% | Depending on the lender |
Buy-to-let | Landlords | Up to 75% | Higher |
Guarantor | People with no or little credit history, first-time buyers | Up to 100% | Depending on the lender |
Offset | People with large savings | Up to 80% | Higher |
Flexible | People with flexible income | Depending on the lender | Higher |
Small/zero deposit | First-time buyers | 95% to 100% | Higher |
Joint | Multiple buyers | Up to 100% | Depending on the lender |
You can get all of these as:
Interest rates | Predictability | Budgeting | |
---|---|---|---|
FIxed-rate | Higher | Higher | Easier |
Variable-rate | Lower | Lower | Harder |
And repay them according to one of these two models:
Interest rates | Risk | Paying off the capital with monthly payments | Easy to find | Eligibility criteria | |
---|---|---|---|---|---|
Interest-only | Higher | Higher | No | No | Stricter |
Repayment | Standard | Lower | Yes | Yes | Less strict |
Remortgaging, either with a new lender or a new product, depends on the deal you have: fixed deals come with more restrictions and penalties, while SVRs tend to be fairly simple to switch from. However, the process takes time and usually comes with additional fees. You can read more in our guide to remortgaging.
How do I find the best mortgage?
The best mortgage will depend on your answers to some key questions:
What type of property do I want to buy?
How much can I set aside for a deposit?
Am I buying it alone or with a partner/friend/family?
What monthly repayments can I afford?
Once you know what you’re working with, check your credit score with all three credit bureaus and get your credit report. In the meantime, make use of online tools such as mortgage price comparison sites and mortgage affordability tools. You can find out more about mortgage applications and what the timeline looks like here.
Tip: Factor in the fees. Some mortgages look cheaper than others — until you include arrangement, exit, and other fees.
However, it’s a rough period to be looking for mortgages alone. Instead, the safest way to find a mortgage is with the help of a mortgage broker, who might also have access to deals that are not readily available to borrowers.
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For those who need mortgage advice fast, we recommend Unbiased, an online resource that fits all the requirements, with free service and an army of 27,000 financial advisers.
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