Types of mortgages

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Types of mortgages

You’ll come across a few mortgage types on your journey, and while they all have the same outcome – you paying the lender back for your home – they all have different features. These differences usually boil down to how much interest you pay, and if that number changes or not.

This list isn’t exhaustive, but it covers the most common types of mortgage you’ll see when you’re exploring your options.

Fixed rate vs. variable rate

The two terms you’ll see a lot are ‘fixed rate’ and ‘variable rate’.

With a fixed rate mortgage you’ll know exactly how much interest you’re going to pay, as the number doesn’t change. This offer usually only lasts for a few years (the time varies between lenders), after which you’ll be moved to the lender’s standard variable rate instead. It’s handy because you won’t have any unpleasant surprises for that time period, and you’ve won if the standard variable rate shoots up, as you’re still paying lower. However, in reality your fixed rate is likely to be a bit higher than the variable rate, especially if the variable rate drops.

With a variable rate mortgage the amount of interest you pay changes, and can do so any time. At first that sounds like a bad idea, but it can actually help you save money if things work in your favour.

So those are the two main types of mortgages. Seems simple, right? Well, not quite. 

When you start looking at variable rate mortgages, there are lots of different options:

  • Standard variable rate (SVR) mortgages: Your lender can change the amount of interest you pay at any time.
  • Tracker SVR mortgages: Like a standard variable rate mortgage, except the interest rate rises and falls with Bank of England’s interest rate.
  • Capped SVR mortgages: Again, like a standard one, except there’s a cap on how high the lender can raise the interest.
  • Discount SVR mortgages: Exactly what it sounds like! This is usually the lender’s usual SVR mortgage, but with a bit of interest knocked off for the first couple of years or so.
  • Offset SVR mortgages: A mortgage where the amount of interest you pay is linked to how much money’s in your savings account. The more you save, the less interest you pay.

To read more about any of these mortgage types, check out our full guide to variable rate mortgages.

Other types of mortgage

There are plenty of other mortgage types for buyers who are purchasing homes for very specific reasons, such as a Buy to Let mortgage, which is designed for investors who only intend to rent out their new property instead of living in it themselves. But the above mortgages are the ones you’re mostly likely to come across as a ‘normal’ buyer, no matter how many times you’ve moved before.

You can read about different mortgages in more depth here.

It’s worth mentioning that the above types of mortgage are all ‘repayment’ mortgages. Once upon a time buyers, especially first timers, could choose an ‘interest only’ mortgage where only the interest was paid each month, but they’re very rare now. 

So what now?

If your head’s still spinning, you’re not alone. There are lots of mortgages out there, and it’s important that you find the one that works best for you. Your mortgage broker will be able to explain everything to you and help you choose the best one.

Understanding different mortgage types is particularly important if you already have one and you’re looking to switch to a better deal. We’ll talk about remortgaging in the next section.

Not remortgaging? Let’s skip to the application process instead.

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