With thousands of different mortgage deals to choose from, it’s not always easy to work out which one might be 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.
If you’re looking for mortgage advice, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.
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 when 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 usually won’t be able to move to a lower rate.
Fixed deals were highly competitive last year, but with several increases in the base rate in recent months, lenders have been busy following suit and raising their mortgage rates. If you’re not sure whether a fixed rate deal is right for you, read our article Should I go for a fixed or variable rate mortgage?
You can compare the best fixed rate mortgage deals currently available in the market using our mortgage comparison tool.
Tracker mortgages
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.
Tracker rates are usually most popular when interest rates are falling rather than rising as they are now, but it’s worth noting that many tracker deals have a ‘collar’ below which the rate cannot drop.
This type of mortgage also comes with the risk of higher repayments now that the Bank of England has started raising rates. If you’re considering a tracker mortgage, it’s important to make sure you’d be able to handle increases in monthly repayments should the Bank raise rates further.
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.
Offset mortgages
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. You can find out more about how offset mortgages work in our guide What is an offset mortgage?
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 7.12%, according to financial website Moneyfacts.co.uk. Mortgage brokers routinely advise not to stay on your lender’s SVR to avoid paying over the odds in interest, although recent weeks have seen some fixed rate deals priced higher than SVRs. Rates are now showing signs of stabilising though, so in the vast majority of cases, staying on the SVR will be the more expensive option.
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. If you’re finding it hard to pay off your interest-only mortgage, read our article How do I pay off my interest-only mortgage?
Retirement interest-only mortgages (RIO)
This 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, but now several lenders provider RIO mortgages. Most providers are building societies including Nationwide Building Society, Tipton & Coseley Building Society, Bath Building Society and Hodge Lifetime.
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.
You can read more about retirement interest-only mortgages in our article How retirement interest-only mortgages work.
Lifetime mortgages
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.
If you want to see how much you might be able to release from your home and how much it could cost, this equity release calculator can give you an estimate. Fill in a few details to get an estimate.
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
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% of the property value 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.
Let-to-buy mortgages
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.
And finally...
You can find out more about all the different mortgage options that may be available to you in our articles Mortgages for over 50s: What you need to know and Mortgages for over 60s: what you need to know.
If you want to learn more about comparing mortgages and choosing the right deal to suit your needs, check out our guide What’s the best way to compare mortgages?
It’s not always easy to work out which mortgage is right for you, particularly if your circumstances are complicated, 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?
If you’re looking for mortgage advice, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.