Each mortgage type is designed to suit different circumstances and people, so it's important to do your research and choose the one that’s right for you.
But with fixed rate, variable rate, and tracker mortgages to choose from, finding the right mortgage can be tricky – especially when you also have to decide whether to repay the capital, pay off the interest only, or offset your savings against your mortgage.
There are also government-backed schemes to consider, as well as guarantor and family assisted options.
In this guide we explain all the different kinds of mortgages available, and set out the benefits and drawbacks of each one.
With a fixed rate mortgage, your interest rate is fixed at a certain level for a set period of time, usually between two and 10 years.
This means you don’t have to worry about your repayments going up if the Bank of England base rate increases or your mortgage provider raises its Standard Variable Rate (SVR). However, it also means you could end up losing out if interest rates fall, as a fixed rate is locked in for the duration of the deal and you’ll usually have to pay to switch away within that time.
Once your fixed rate deal comes to an end, you will generally be automatically moved on to your lender’s SVR. This is unlikely to offer the best value for money, so it’s a good idea to look into remortgaging to another fixed rate deal or a cheaper variable rate mortgage.
With a variable rate mortgage, the interest rate you pay can fluctuate. When you take out a variable rate mortgage, it will usually offer a discount on the mortgage lender’s SVR for a certain time, say two or five years. If the SVR goes up or down during that time, the discounted rate will rise or fall in line with the change.
SVRs often change if the Bank of England base rate moves. However, lenders do not have to pass on any base rate cuts in full, and can choose to increase their SVRs at any time. This differentiates discounted variable rate mortgages from tracker mortgages, which always track the changes made to the base rate – rather than the lender’s SVR.
A tracker rate mortgage is another kind of variable rate mortgage that tracks the Bank of England base rate as it moves up and down. You might, for example, take out a tracker mortgage that charges interest at the base rate plus 1%, so if the base rate is 0.1%, your rate is 1.1%.
An interest only mortgage is a mortgage with which you only pay off the interest owed each month, without making any payment towards the amount borrowed. This means your mortgage payments will be lower, but that you will need a large lump sum to pay off the ‘capital’ or original loan amount at the end of the term. The idea with interest only mortgages is therefore to have the amount you might normally pay for the mortgage saved up in a separate account, gaining interest.
However, there are risks involved in this approach - if you invest the money you intend to use to pay off the capital, your savings pot might depreciate in value and you aren’t guaranteed to have enough to pay off your mortgage when all is said and done. There are now very few interest only mortgages available due to this risk.
With a capital repayment mortgage, your monthly repayments are made up of interest and a payment towards the underlying loan amount. This is the standard mortgage repayment plan, and is the one you are most likely to be offered, whether you take out a fixed rate, variable rate, or tracker mortgage.
Many repayment mortgages also allow you the option of overpaying on your monthly repayments, which can save you money in the longer term and help you pay your mortgage off more quickly. However, you may face charges if you overpay by more than a certain amount, say 10% of the mortgage value per year.
With an offset mortgage, you can use ‘offset’ your savings against the amount you owe on your mortgage. So if you have £30,000 in savings, and you owe £280,000 on your mortgage, your offset mortgage payments will be calculated as if you owed £250,000.
An offset mortgage can be a good option if you have a lot of savings, but are unwilling to use them to pay down your mortgage because you want access to them if necessary. However, the interest rate you earn on your money in an offset mortgage account 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, it’s therefore worth comparing the returns you could get via a savings account with the savings you can get from an offset mortgage.
The government-backed Help to Buy: Equity Loan scheme aims to first time buyers with a low deposit get on the housing ladder. If, for example, you only have a 5% deposit, you can borrow 20% (or 40% in London) of the cost of your home from the government, then take out a mortgage for the remainder.
Only available on new-build homes with regional property price caps imposed, the scheme offers the loans at 0% interest for the first five years and will end on 31 March 2023.
There’s also a Help to Buy: Shared Ownership scheme for new builds or properties being sold on by housing associations. With it, you can buy a 25% to 75% share in the property and pay rent on the rest. When you can afford to, you can then buy the rest of the property. It’s only open to households that earn £80,000 or less a year (or £90,000 or less in London).
Most mortgages require a deposit of around 10% to 20% of the property’s value, but with average house prices at around £250,000 this can be hard to find.
Guarantor and family offset mortgages allow buyers to get a friend or family member to either loan them a deposit or put up their property or savings as security.
The interest rates on these kinds of mortgages are generally higher than on standard deals, but they can be useful for those who can't get a big enough deposit together otherwise.
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 guarantee to make your mortgage repayments if you cannot. But beware: both of you could potentially lose your homes if you fail to keep up with the repayments.
With a family offset mortgage, a family member effectively loans you the money for a deposit by paying it into a linked savings account. They get the money back, sometimes even with interest, but only once you have cleared a set percentage of the loan, say 20% or 30%.