There are thousands of mortgages available in the UK, and when you come to apply for a mortgage, it’s important to understand how they differ from each other so you can select the most suitable choice for you.
To add to the confusion, there are a number of different factors that determine the ‘type’ of a mortgage, meaning every single mortgage will, theoretically, have more than one type.
For example: A mortgage could be a 2-year fixed-rate, offset repayment mortgage. However, each element of this product may be referred to as ‘the mortgage type’
Below we’ve broken mortgage types down into subtypes to help:
The repayment type is exactly as it sounds, it’s the way in which you repay what you’ve borrowed. Every mortgage has a repayment type and there are 2 main types that you can choose. Repayment mortgages are by far the most commonly used for residential customers, whereas interest-only tends to be more popular with buy-to-let mortgage applicants. There’s also a third and fairly unusual option, known as a part and part mortgage:
In 2024 to date, more than 89% of Habito-arranged mortgages were repayment type. A repayment mortgage is where you pay back both the money you’ve borrowed, and any interest payable on your loan each month. At the end of the mortgage term, you’ll have paid off the entire loan and will own the property outright.
Interest-only mortgages are less commonly used because they are more risky. This is because you don’t actually pay off any of the money that you’ve borrowed during the mortgage term – as you’ve probably guessed, you just pay the interest each month. While this means that your monthly payments will usually be significantly lower, you’ll have to find the money to repay the entire loan at the end of the mortgage term. This is often achieved by selling the property, which is why it’s more popular with buy-to let investors than homeowners.
Although fairly rare, some lenders offer a part interest-only, part repayment mortgage. This is literally the two options above combined, meaning monthly payments are typically lower than a repayment mortgage, but more expensive than an interest-only mortgage. While you’ll have to repay some of the outstanding loan at the end of the mortgage term, it won’t be the entire amount, like with an interest-only mortgage. This might be a good option if you know you’ll have an inheritance later in life, for example, that could be used to repay the outstanding loan.
As well as having a repayment type, all mortgages have an interest rate type, which determines how interest is charged on the mortgage loan. Interest rates will either be fixed, or variable, but there are 3 types of variable rate mortgage:
With a fixed-rate mortgage, your lender guarantees your interest rate will stay the same for a set amount of time. You can choose the length of the initial (or ‘fixed’) period, usually 2, 3, or 5 years - although there are longer-term fixes available. With this option you pay a set interest rate until the initial rate expires. But don’t worry, it’s possible to remortgage onto a new fixed-rate deal before your fixed-rate deal ends, to maintain the security of knowing what your interest rate is each month. If you choose not to, you’ll automatically fall onto your lender’s standard variable rate (SVR).
There are 3 main types of variable interest rate, and the difference that they all share with fixed-rate mortgages is that they can all change at any time - hence the word variable:
Every lender has an SVR which they are free to set and adjust whenever they like. This is not a type of deal, it’s what people fall onto when their mortgage deal ends. This means that there is no minimum term, so you can leave an SVR rate whenever you like, but it’s typically the most expensive a lender has, as it’s not designed to attract new customers.
Discount rate mortgages usually refer to a discount on the lender’s SVR. While the discount is typically set for a defined period of time, like with fixed-rate deals, the rate is still variable. This means that you could have a 1% discount on a 6% SVR and be paying 5% to start with, however, if the lender increases their SVR to 7%, you still get the 1% discount, but your interest rate would rise to 6%.
Tracker rates follow an external interest rate, often the Bank of England base rate and move up and down in line with this rate. For example, if the base rate is 5%, a tracker rate may be base rate +1.5%. This means you would pay 1.5% more than the base rate, whether it goes up or down. While there is risk involved in the potential for the rate your tracker is following rising, you can benefit and save money if it falls.
It’s possible to have a cap (or ceiling) on both tracker and discount rates. These are fairly rare, but they do add an additional line of defence to variable mortgage rates, as they have a set level that your interest rate would never rise above.
On the other hand a collar rate, (or floor) is something you don’t want to see on a variable rate. This is the opposite of a cap, so it limits the amount you would be able to benefit, should rates fall.
On top of a repayment and interest rate type, some mortgage products also have additional features or terms that can be called ‘mortgage types’. They tend to refer to specific benefits that a mortgage product has, so won’t necessarily be offered by every lender.
It’s important to understand that all mortgages that fall into these categories will also have a repayment type and an interest rate type:
A range of products may be referred to as flexible mortgages, and they usually have terms that allow you to overpay and/or underpay your mortgage. They may also allow for a payment holiday (where you can miss a few monthly payments) if you need to. This type of benefit can mean that the deal has a higher interest rate.
Offset mortgages allow you to link your savings account to your mortgage to reduce the amount of interest you pay. For example, you may have £10,000 in your savings account, and £100,000 to repay on your mortgage. With an offset mortgage you only need to pay interest on £90,000 of your outstanding mortgage balance, so long as you don’t take any out of your savings account. However, keep in mind that you won’t earn any interest on your savings.
There are also family offset mortgages, which allow parents and relatives to link their savings to your mortgage in order to help you afford the repayments and reduce the amount of interest you pay.
A JBSP mortgage allows you to add family members or friends to your mortgage to aid in your borrowing, but without them having any ownership over your home. This is useful for those on a low income who are not able to borrow enough to buy the type of home that they need.
A green mortgage offers certain benefits to those who buy or remortgage energy efficient property. Benefits vary from lender to lender, but typically award the most efficient homes with lower interest rates, cashback or the ability to borrow more to make energy efficient improvements.
Another common trait in the mortgage industry is to refer to a product that is suitable to a certain group of individuals as a mortgage type. This means that you might hear a mortgage referred to as being a particular type, but in reality, it’s just available to a subset of people. Here are some examples to clarify:
None of these are a specific mortgage type, it’s simply referring to any mortgage that accepts applicants with these needs.
The size of your mortgage loan, alongside your deposit, will determine the maximum property value you could afford, so, understandably, it’s important to know from the outset.We look at how the size of your loan is calculated by lenders, how to use a mortgage calculator and what to do if you can’t borrow as much as you’d hoped.
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