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How many different types of mortgage are there?

There are many different types of mortgages to suit a variety of circumstances and people, so it’s important to do your research and compare the mortgage market.

With fixed rate, variable rate or tracker rate mortgages, and the option to pay interest only, capital or offset, finding the right mortgage can be a confusing and difficult task.

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There are also government backed schemes to help with getting a mortgage, as well as guarantor and family assisted options.

Nonetheless, the main aspect to look out for is the cost of the mortgage, which can be mostly attributed to the lender’s ‘standard variable rate’ (SVR), which is essentially the amount of interest you will pay on your mortgage.

In this guide we explain all of the different kind of mortgages available and the benefits and drawbacks of each one, and what to do to ensure you get the best deal possible for you and your situation.

Fixed rate mortgage

A fixed rate mortgage usually applies to the deal available at the start of a mortgage. That deal fixes the interest rate on your mortgage for a set amount of years – usually two or five years.

If your rate is fixed then you do not have to worry about paying more if the mortgage provider raises its SVR. On the other hand however, you could be losing out if the mortgage provider lowers its SVR. A fixed rate is locked in for the duration of the deal.

All fixed rate deals come to an end, so be prepared to move to a higher SVR, which means paying more on your monthly mortgage repayments. It might be a good idea to look into a remortgage deal a few months before your fixed rate mortgage deal comes to end, so you can switch to another fixed rate deal or a cheaper variable rate.

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Look at mortgages where your mortgage rate will remain at fixed rate for a set period of years.

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Variable rate mortgage

For the most part, mortgage interest is usually ‘variable’. A variable mortgage is simply one where the interest rate you pay is not guaranteed to stay the same.

In fact, unless you have a fixed rate deal (which only fixes the rate for a set period), you are never guaranteed to pay the same interest rate for the entire duration of your mortgage.

The variable rate you pay will fluctuate depending on market factors and, in particular, any changes made by the Bank of England to the interest rate. You can still get a discount on your variable rate mortgage, which will usually last for a period of around 1 year, two years, or five years.

A discounted mortgage is a discount on the lender’s standard variable rate, guaranteeing you a cheaper deal. Even if the standard variable rate rises, your mortgage deal will still be cheaper than the SVR, although it will also rise.

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Look at mortgages where your rate will vary at the discretion of your bank and move with the market.

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Tracker rate mortgage

A tracker rate mortgage is another kind of variable rate mortgage. Usually these work as short term deals on mortgages that simply ‘track’ the Bank of England interest rate.

The tracker rate is still going to be higher than the bank interest rate, but it will move up or down according to the Bank of England’s changes.

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Look at mortgages where your rate will follow the base rate set by the Bank of England.

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Interest only mortgage

An interest only mortgage refers to the type of repayment plan you will make. Technically, you could have an interest only fixed rate mortgage or an interest only variable rate mortgage.

The interest only repayment plan on a mortgage involves simply paying the interest. However, you would still owe the rest of the mortgage, so the idea is to have the amount you might normally pay for the mortgage saved up in a separate account, gaining interest.

It makes being able to pay off a mortgage, technically cheaper in the short term, as you will have more money left over. But when you come to the end of your interest repayments you will then need to pay a large lump sum of cash to cover the rest of the mortgage.

Also, if the property loses value, then you could have negative equity in the property as you will still have a significant portion of your mortgage to still repay.

Since the Mortgage Market Review in 2014, following the financial crash in the early 2000s, interest only mortgages have almost completely dropped out of the market, although some still exist.

The risks are large and could be more trouble than the attractive advantage of paying a smaller amount on your monthly mortgage repayments.

Compare interest only mortgages

Look at mortgages where you will will only pay interest on the amount you've borrowed, but not the total debt.

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Capital repayment mortgage

A capital repayment mortgage is the standard mortgage repayment option. It involves repaying the mortgage and the interest combined every month.

The more you pay back, the less you will owe as your interest reduces. If you choose to ‘overpay’ on your mortgage, then you could reduce your monthly repayments. Overpaying is essentially using any extra money you have to pay more than what you owe – you can usually go up to 10% of the mortgage value per year.

You can still get a tracker, variable or fixed rate mortgage on a capital repayment plan, so your mortgage’s interest rate will still affect how much you pay.

Compare capital repayment mortgages

Look at mortgages where you will pay off the amount you have borrowed in full at the end of the term.

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Offset mortgage

An offset mortgage allows you to use your savings account to ‘offset’ the cost of your mortgage. This can work out well if you have a growing savings account that you want to make use of.

An offset mortgage is similar to overpaying your mortgage on a standard capital repayment plan. You use your savings to overpay your mortgage and reduce the amount you owe overall.

However, unlike overpaying on a capital repayment plan, an offset mortgage allows you to get back the money you overpaid. For example, if you paid £5,000 extra (an overpayment) one year, you could withdraw £5,000 from your mortgage in case you needed it.

An offset mortgage is like having a savings account linked to your property. However, the ‘savings’ rates might not be as good as putting your money in a regular savings account and overpaying on a capital repayment plan.

If you plan to overpay on your mortgage then compare savings rates between the bank account and offset mortgage market. You would also need to determine how important it is to you to have the peace of mind an offset mortgage provides, or the potentially better savings of a capital repayment plan.

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Look at mortgages that have an offsetting facility included

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Help to buy mortgage

Help to buy mortgages are a government backed scheme aimed primarily at first time buyers. The scheme works by encouraging mortgage lenders to approve applications from first time buyers by guaranteeing a portion of the mortgage.

The government will boost the deposit of borrower by up to 20% (up to 40% in London) with an “equity loan”.

Guarantor and family assisted mortgages

Most mortgages require a deposit of around 10% to 20% of the value, but for many people this can be difficult to put together.

Guarantor and family assisted mortgages are a niche mortgage type that allows buyers to get a friend or family member to either loan them a deposit or put up their savings as security.

The interest rates on these kinds of mortgages are generally higher than the market leading rates, but can be useful for those who can’t get a big enough deposit.

With a guarantor mortgage a friend or family member who has a very good credit score and enough savings or property to use as security will help your application. The risk falls on both of you, as you could potentially lose your homes if you fail to keep up with your mortgage repayments.

With a family assisted mortgage, a family member will loan you the money for a deposit, which will be kept with the mortgage lender, and it will be repaid to them once you have paid around 20% to 30% of the mortgage.

Read more…

Compare all types of mortgage with uSwitch

Compare mortgages if you're remortgaging, a first-time buyer, looking for a buy-to-let or moving home

Compare mortgages