Borrowers have around 5,000 different mortgage deals to choose from, so it’s not always easy to work out which one’s right for you.
Before you start comparing deals, you can narrow down the options available to you by deciding on the type of mortgage that suits your circumstances.
Here’s our run down of the main options and how they work. Remember, if you’re not sure which kind of mortgage to go for, it’s a good idea to seek advice from a fee-free mortgage broker. They can help you find the right mortgage for you based on your individual circumstances. We’ve chosen to partner with Fluent Mortgages to offer fee-free advice – you can request a free, no obligation callback here.
Fixed rate mortgages
Fixed rate mortgages are one of the most popular types of home loan as they offer peace of mind that monthly repayments won’t suddenly rise if interest rates go up.
You can fix a wide range of different periods, including two, five, seven or 10 years.
It might seem sensible to fix for as long as possible but there are two things to consider before you do this. First, if your circumstances do change you might need to sell up and redeem (pay off) the mortgage. There are often hefty early repayment charges to pay if you do this, so fixing your rate for too long could cost you if you want to leave your deal before it finishes. Second, if fixed rates become cheaper over time and you’re locked into your existing deal, you could lose out as you won’t be able to move to a lower rate.
The good news is that rates on fixed mortgages are highly competitive at the moment thanks to the Bank of England base rate being at a record low of 0.1%.
You can compare the best fixed rate mortgage deals currently available in the market using our mortgage comparison tool.
Another option is a tracker mortgage, where your mortgage rate rises and falls in line with interest rates set by the Bank of England, or sometimes a separate rate set by the individual lender.
Currently tracker rates appear very attractive as interest rates are so low, but it’s worth noting that many tracker deals have a ‘collar’ below which the rate cannot fall.
This type of mortgage also comes with the risk of higher repayments when the Bank of England eventually does start raising rates. It’s important to make sure you’d be able to handle an increase in monthly repayments should this happen.
Discounted rate mortgages
This type of mortgage offers a discount off the lender’s standard variable rate (SVR). The SVR is the rate you usually move onto once your fixed, tracker, discounted or other type of mortgage deal ends.
As with a tracker mortgage, a discounted mortgage is a variable rate deal because the SVR can move in line with interest rates – or when the lender decides.
Capped rate mortgages
Another type of variable mortgage, capped rate mortgages have an interest rate limit, or cap, above which the interest rate charged cannot rise. This offers an element of security that you won’t pay over a certain amount per month.
An offset mortgage may be worth considering if you’re lucky enough to have a decent cash savings pot.
They work like this – you keep your savings in the offset mortgage account, but you don’t earn any interest on this cash. Instead the balance is offset against the debt, with mortgage interest charged only on the difference.
For example, if you have £20,000 in savings and a £200,000 mortgage, you will only have to pay interest on £180,000.
This means you pay less interest which allows the mortgage to be paid off earlier. How much you’ll save depends on your mortgage interest rate and the amount you have in savings. It’s a fully flexible arrangement which means that you can withdraw or add to your savings at any time.
As your savings are not actually used to reduce the mortgage balance, they will still be there for you to spend at the end of the term.
The catch is that offset mortgage rates tend to be a little more expensive than traditional mortgages, as you pay a premium for that all-important flexibility.
Standard variable rate (SVR)
As previously mentioned, the standard variable rate (SVR) is the basic rate your mortgage lender charges. Any fixed, discounted or other type of deal will revert to this rate when it expires, unless you remortgage at this point.
Changes in the SVR might occur after a rise or fall in the base rate set by the Bank of England, although, banks and building societies can increase – or cut them – whenever they choose.
The average SVR is currently 4.41%, according to financial website Moneyfacts.co.uk, which is much higher than fixed or variable rate deals offer. Mortgage brokers routinely advise not to stay on your lender’s SVR to avoid paying over the odds in interest.
Interest-only vs repayment
You might see the option for “repayment” or “interest only” when choosing a mortgage.
Repayment mortgages involve paying both interest and some of the capital you’ve borrowed back each month. At the end of your mortgage term, which can typically range from 25-40 years, you’ll have paid back everything you owe and will own your home outright.
With an interest-only mortgage, however, as the name suggests, you only pay the interest you owe each month, and none of the capital. This must be repaid at the end of your mortgage term, so you need to prove to lenders that you’ll have savings available to do this.
Selecting interest-only used to be popular with cash-strapped first-time buyers looking to reduce their monthly outgoings. But at the end of the loan you’ll have to find enough money to repay the whole debt. Lenders are less likely these days to offer interest-only loans to encourage people to start paying off the actual debt from the beginning.
Retirement interest-only mortgages (RIO)
This new type of mortgage was launched in March 2018, designed to help people get loans in later life.
Retirement interest-only mortgages (RIOs) work like a standard interest-only mortgage product in that borrowers make monthly interest payments. But there is no set end date or term for the mortgage. Instead, payments continue until either the borrower dies or goes into long-term care, at which point the property is sold in order to repay the debt.
When the loans were first launched only two providers offered them. As of February 2021, there are 22 providers offering 109 retirement interest-only mortgages– up from just 74 in February last year. Most providers are building societies including Nationwide Building Society, Tipton & Coseley Building Society, Bath Building Society and Hodge Lifetime.
There are loans available with rates of around 3%, with the best rates reserved for those with higher levels of equity in their homes. Borrowers must have at least 35% equity in their home to be eligible. As with other types of mortgage, they must also undergo affordability tests when they apply, and will need a steady income such as a defined benefit pension or an annuity.
Less than 3,000 RIOs have been taken out since launch, according to data analysed by later lending company Responsible Life. It was previously estimated (by the city regulator the Financial Conduct Authority) that around 21,000 of the mortgages, worth £1.7 billion, would be sold every year by 2021.
You can read more about Retirement interest-only mortgages in our article How retirement interest-only mortgages work.
A lifetime mortgage is the most common type of equity release plan in the UK. It involves taking out a mortgage on your home that does not need to be repaid until you die or go into long-term care.
The main difference between a standard mortgage and a lifetime mortgage is that for most lifetime mortgages, you do not need to make any monthly payments and you only need to repay the mortgage loan when you die or go into long term care.
A lifetime mortgage can be used for a number of different reasons including to boost your income; to clear an existing mortgage – perhaps an interest only mortgage that is ending; to fund home improvements or to enable you to gift money to your loved ones before you die.
Whilst the idea of no monthly mortgage payments can be attractive from a budgeting and cashflow perspective, it means that interest will be compounded on the money you owe. This means that interest gets charged on both the amount borrowed and also the previous interest due, so the total amount owed can grow quickly and add up to a large portion of your property’s value over time. You can use our helpful equity release calculator to see how much a lifetime mortgage is likely to cost here.
For this, and other reasons, a lifetime mortgage should not be entered into lightly and won’t be suitable for everyone. Anyone considering taking out any form of equity release plan or lifetime mortgage is also required to take professional financial advice to ensure they understand the risks.
To find out more about equity release and lifetime mortgages, including the risks, the potential alternatives and where to go to get help – you can read our comprehensive equity release explainer guides here.
Buy-to-let mortgages are designed specifically for landlords.
As with residential mortgages, there’s a choice of variable or fixed rate deals available.
However, the amount you are able to borrow on a buy-to-let mortgage is worked out differently to a residential mortgage. It’s based on your potential rental income rather than your salary and outgoings.
Buy-to-let mortgages require at least 25% as a deposit.
Rates for buy-to-let mortgages, as well as arrangement fees, tend to be higher than for residential mortgages. Most landlords choose interest-only loans to ensure that their monthly repayments will be affordable – knowing that the property can be sold if necessary at the end of the mortgage term if the capital needed to be repaid.
You can read more about buy-to-let mortgages in our guide Understanding buy-to-let mortgages.
Alternatively, compare the best buy-to-let mortgage deals currently available with our buy-to-let mortgage comparison tool.
This is the reverse of a buy-to-let mortgage. With let-to-buy a loan, the borrower retains ownership of their existing home and rents it out, and then buys a new home for themselves and their family to live in.
These mortgages can be instrumental in helping families who need to move but can’t sell their home. They are not as widely known as other mortgage types but are offered by around 20 lenders, including some high street lenders. Borrowers will need two mortgages, one for the property they want to rent out, and another for the property they are buying to live in.
It’s not always easy to work out which mortgage option is right for you, so if you’re in any doubt, it’s worth speaking to a professional mortgage advisor. You can read more on why this might be a good idea in our guide should I get advice on my mortgage?
There are a number of fee-free mortgage advisors available on the market, but if you’re looking for somewhere to start, we’ve chosen to partner with Fluent Mortgages to offer fee-free mortgage advice on the options that may be available to you based on your individual circumstances. You can request a free, no obligation callback here.
Are you looking for a new mortgage or want to share your experience of getting a mortgage? If so, we’d love to hear from you. You can join the conversation on our community forum or leave a comment below.