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Types of Mortage Explained

Table of Contents

In today’s market, you’ll find a variety of mortgage options. It’s crucial to understand which one suits your needs to secure the most suitable deal for you.

While all mortgages work similarly, they can vary in factors such as interest rates, repayment methods, and fees. Therefore, it’s not just about selecting the lowest rate, but rather about finding the mortgage that aligns with your financial circumstances to ensure the best fit. 

To bring you up to date, we’ve prepared this comprehensive guide that explains the various types of mortgages available in the UK. We’ll also discuss the advantages and disadvantages of each option.

Let’s start by exploring the key differences between repayment mortgages and interest-only mortgages, which are the two main types you should be familiar with. After that, we’ll delve into variable and fixed-rate mortgages, both of which fall under the category of repayment mortgages.

We will also cover all the other types of mortgages you can easily get to using the Table of Contents.

Interest-Only Mortgage vs Repayment Mortgage

The majority of mortgages belong to the repayment mortgage category, except for interest-only mortgages. Let’s take a closer look at each type and explore their definitions and differences.

What is a Repayment Mortgage?

A repayment mortgage is a type of mortgage where you make regular payments that cover both the borrowed capital amount and the interest on the loan. The goal is to gradually repay the original loan amount and the interest over the agreed-upon term of your mortgage. This approach allows you to build equity in your home over time, eventually leading to complete ownership.

If you decide to move while still having a repayment mortgage, you have a couple of options. You can choose to repay the original loan and obtain a new mortgage for your new home, or you can transfer your existing mortgage deal to the new property. This process is known as “porting” your mortgage.

Almost all types of mortgages fall into the category of repayment mortgages. The only exception is the interest-only mortgage, which we’ll discuss in more detail shortly. 


This sort of mortgage is for a homebuyer who aims to increase the value of their home over time and eventually become the full owner of the property by the end of the repayment period.

What is an Interest-Only Mortgage?

With an interest-only mortgage, you are obligated to make monthly payments that cover only the interest on the loan, without any contribution towards the borrowed capital amount. Instead, the repayment of the loan is deferred until the end of the mortgage term.

It is essential to ensure that you have a plan in place to repay the entire debt when the time comes. This differs from a repayment mortgage, where both the capital amount and the interest are paid back gradually over time.

One advantage of an interest-only mortgage is that it offers lower monthly repayments compared to other mortgage options. However, it’s important to ensure that you have accumulated sufficient funds to repay the entire loan at the end of the term. Otherwise, you may be required to sell the property in order to cover the outstanding amount.

Additionally, since you are paying interest on the entire loan amount without reducing it over time, an interest-only mortgage tends to be more expensive in the long run compared to a repayment mortgage.


This sort of mortgage is for a buyer who seeks lower monthly payments but is confident about having sufficient funds to repay the mortgage in full when it becomes due.

Variable Rate Mortgage vs Fixed-Rate Mortgage

Variable-rate mortgages and fixed-rate mortgages are two types of repayment mortgages. The main difference between them is how the interest rate is calculated.

Now, let’s take a closer look at the main ways these mortgages differ and who might benefit from each one.

What is a Fixed-Rate Mortgage?

With a fixed-rate mortgage, the interest rate remains the same for a specific period, regardless of any changes in the Bank of England base rate or market fluctuations. This steady interest rate is often called the “introductory rate.” Once you secure a fixed-rate mortgage, you are committed to this introductory rate for a set duration, and if you decide to switch or leave, you may be subject to exit fees.

Normally, the fixed rate period, also known as the initial rate period, lasts for the first two, three, or five years of the mortgage term. During this period, you will know exactly how much you need to pay each month, which remains unchanged until the fixed period ends. This stability can be helpful for budgeting. Choosing an interest-only mortgage allows you to lock in your mortgage interest rate, which can be advantageous if you anticipate an increase in the Bank of England’s base rate.

The predictability of fixed-rate mortgages is particularly attractive to first-time buyers who want to plan their finances for the initial years in their new home. It also provides reassurance to homeowners who prefer knowing their monthly repayment amounts.

On the downside, once you commit to the initial term, switching to another mortgage may be difficult due to substantial penalties imposed by most lenders. In addition, you won’t benefit from any decreases in interest rates that may occur during your term, but you will be safeguarded against any rate increases.

When the fixed-rate period of your mortgage comes to an end, you will be automatically transferred to your lender’s standard variable rate (SVR), which tends to be higher.

At this stage, many people decide to remortgage, which means switching to a new mortgage deal that offers better terms. 


This sort of mortgage is an excellent option for someone seeking stability and the ability to plan their finances accurately, particularly at the start of their mortgage journey, such as first-time buyers.

It is also suitable for homeowners who wish to secure a favourable mortgage rate, especially if they anticipate an eventual increase in the base rate.

What is a Variable Rate Mortgage?

A variable rate mortgage is a type of mortgage where the interest rate can fluctuate, either increasing or decreasing, at any time. Unlike a fixed-rate mortgage, there is no specific period during which the interest rate remains constant, and your monthly payment amount may change accordingly.

The interest rate of a variable rate mortgage is influenced by factors such as the Bank of England’s base interest rate and other market conditions.

Furthermore, it’s important to note that there are multiple types of variable rate mortgages, each with its own way of calculating the interest rate. These different types offer various advantages and disadvantages depending on your specific needs. 

Here are the main types of variable rate mortgages:

What is a Standard Variable Rate Mortgage?

A standard variable rate (SVR) mortgage is a type of mortgage where the interest rate is determined by the lender itself. Although the SVR is not directly linked to the Bank of England, it is often influenced by its rate changes.

With an SVR mortgage, the lender has the ability to increase or decrease the interest rate on a month-to-month basis, which means your monthly payments may vary accordingly. This can make it challenging to plan your future budget. However, being on an SVR mortgage grants you more flexibility, allowing you to make overpayments or switch mortgages without incurring high penalties.

It’s important to note that once your fixed-rate mortgage deal expires, the lender will typically transfer you to the SVR. This often results in a higher interest rate, unless you choose to remortgage in a timely manner.


This sort of mortgage is for homeowners who want the freedom to switch mortgage products whenever they like or if they can see themselves moving to a different home in the future.

What is a Tracker Mortgage?

A tracker mortgage is a type of mortgage where the interest rate is directly linked to the Bank of England base interest rate, plus a few additional percentage points determined by your lender.

For example, if the base rate is 0.5%, your rate might be set at that plus 3%, resulting in a rate of 3.5%. This means that when the base rate decreases, your mortgage rate will also go down, leading to lower monthly payments. However, if the base rate increases, your mortgage rate will rise, potentially resulting in higher monthly payments.

Most tracker mortgages come with introductory deals, meaning you will be on the tracker rate for a specified number of years. However, there are also “lifetime” deals available that continue for the entire mortgage term. Once the introductory period ends, lenders often transfer borrowers to their standard variable rate (SVR). It’s worth noting that some lenders may impose a minimum rate, regardless of how much the base rate drops. 


This sort of mortgage is for homeowners who have confidence in the base rate decreasing but are also financially prepared to handle potential increases in the rate over time.

What is a Discount Mortgage?

A discount mortgage offers a reduced version of your lender’s standard variable rate (SVR).

The discount amount remains fixed, regardless of whether the SVR increases or decreases. For example, if the SVR is 4.5% and your deal includes a fixed 1.5% discount, you would pay a mortgage rate of 3%. If the lender lowers the SVR to 4%, your rate would decrease to 2.5%.

Most discount mortgages are available for an introductory term, similar to a tracker mortgage. Once this period ends, you will be transferred to the lender’s SVR.

Many deals have stepped discounts, meaning you enjoy the highest discount for a specified term before switching to a lower discount for the remaining introductory period. Additionally, some discount mortgages have a cap, meaning there is a minimum rate they cannot fall below or maximum rate they cannot exceed.


This sort of mortgage is for people, including first-time buyers, who seek a lower interest rate during an initial period and are prepared to handle potential increases in the lender’s standard variable rate.

What is a Capped-Rate Mortgage?

A capped-rate mortgage is a type of variable rate mortgage that comes with an upper limit, or cap, on the interest rate. These mortgages are typically offered as standard variable rate (SVR) or tracker mortgages, following the usual structure but with a predetermined cap.

However, it’s worth noting that capped-rate mortgages have become relatively rare in the current lending market.

The advantage of a capped-rate mortgage is that it provides reassurance that your monthly repayments will never exceed a certain level, ensuring affordability.

However, it’s important to be aware that many capped-rate mortgages also include a lower limit, known as a collar, which prevents the interest rate from falling below a specific level. This means that while you are protected from high rates, there is a possibility that you won’t benefit from exceptionally low rates either.

What are the Other Types of Mortgages?

After exploring variable rate and fixed-rate mortgages, you might be curious about other mortgage options that could better match your financial circumstances.

Fortunately, there are several mortgages with specialised terms that are worth considering.

What is an Offset Mortgage?

An offset mortgage enables you to connect your mortgage and savings accounts to decrease the amount of interest you are charged. This is achieved by offsetting the value of your savings against your mortgage loan, resulting in interest being calculated on the remaining balance. As a result, the monthly interest payments are reduced.

For instance, let’s say you have £15,000 in savings and a £100,000 mortgage. With an offset mortgage, you would only pay interest on £85,000. Assuming an interest rate of 3%, your annual interest payment would amount to £2,550, compared to £3,000 without the offset arrangement.

Many lenders provide the option to either reduce your monthly payments over the same loan term or maintain the same payment amount and repay the loan over a shorter duration. It’s important to note that when you offset your savings, you won’t earn interest on them. However, they are also not subject to tax, which can be advantageous if you are in a higher tax bracket. 


This sort of mortgage is for homeowners who possess significant savings that they do not currently need, particularly for individuals in higher tax brackets.

What is a 95% Mortgage?

A 95% mortgage allows you to borrow 95% of the loan amount while providing a 5% deposit. This results in a loan-to-value ratio (LTV) of 95%. For example, you could obtain a loan of £237,500 with just a £12,500 deposit.

It’s important to note that lenders often charge higher interest rates on 95% mortgage loans due to the higher risk of negative equity associated with smaller deposits.

While these mortgages can be helpful for individuals facing difficulties in saving for a larger deposit, they can make it challenging to build equity in your home. Consequently, this may limit your ability to remortgage to a more favourable deal with a lower interest rate once your current mortgage term ends. 


This sort of mortgage is suitable for people who find it challenging to gather the required deposit for other types of mortgages but are willing to accept a higher interest rate throughout the loan term.

This is quite common first time buyers.

What is a Help to Buy Mortgage?

The Help to Buy scheme is a government initiative in the UK aimed at assisting more individuals in becoming homeowners. The scheme offers three solutions to support prospective buyers:

  1. Help to Buy ISA: This special ISA savings account is designed for first-time buyers who are saving for a deposit. The government provides a 25% boost to your savings.

  2. Help to Buy Equity Loan: The government offers a loan to bridge the gap in deposit funds for purchasing a new-build house. You can borrow up to 20% of the property’s value, enabling you to secure a mortgage of 75% with only a 5% deposit of your own.

  3. Help to Buy Shared Ownership: This option is available for those who cannot afford a full mortgage loan on a property. Instead, you can purchase a share of 25-75% of the property’s value and pay rent on the remaining share.

It’s important to note that the term “Help to Buy mortgage” was commonly used to refer to the Help to Buy Mortgage Guarantee scheme, which ended in 2016. This scheme was designed to allow 95% mortgages with a 5% deposit, with the government assuming more risk to protect the lender.

Esteem Homes also have schemes such as Rent to Buy and Part Exchange to further help people easily move into the home they love.


This sort of mortgage is particularly beneficial for prospective homeowners who require additional support while saving to purchase a home. This initiative is especially helpful for first-time buyers and individuals looking to move into a new-build house.

What is a Flexible Mortgage?

A flexible mortgage is a mortgage product specifically designed to provide you with greater flexibility in repayment options.

Typically, it allows you to make overpayments or underpayments on your loan. Additionally, flexible mortgages may offer other features such as payment breaks, the option to borrow money back, and daily interest calculation.

But, remember to note that lenders often charge a higher interest rate for flexible mortgages compared to regular mortgage deals, mainly due to the additional features and benefits provided.

Below, we’ve outlined some of the key features commonly associated with flexible mortgages:

  • Overpayment: With a flexible mortgage, you have the option to make additional payments above the agreed amount to reduce the balance. However, there may be a cap on the overpayment amount, such as 10% of the balance. Most people choose to overpay when they have extra funds available, either as a lump sum or as regular monthly overpayments. By keeping up with your regular payments and making overpayments, you can shorten your mortgage term and reduce the total interest paid.


  • Underpayment: In certain circumstances, you may be allowed to underpay, meaning you can repay less than the required monthly amount. This is typically subject to approval by your lender and may depend on whether you have previously overpaid enough to cover the underpayments you plan to make.


  • Payment Breaks: Another feature of flexible mortgages is the option to take a payment break, where you temporarily suspend your regular mortgage payments for a month or two. This can be helpful during periods when your finances are strained. However, you will need to apply for a payment break with your lender, and they will consider factors such as your previous overpayments or the length of time you have been repaying your mortgage. It’s important to note that interest continues to accrue during the payment break, so your future payments may be higher to compensate.


  • Borrow Back: Some flexible mortgage deals allow you to borrow back any money you have previously overpaid. While the primary purpose of overpayment is to reduce interest, having the ability to borrow back these funds can be useful when you require money for certain expenses. It’s worth noting that the reduced interest resulting from overpayment is often greater than the interest earned in a savings account, making it an efficient way to save.


  • Interest Calculated Daily: With a flexible mortgage, your interest is calculated on a daily basis. This approach is more cost-effective compared to monthly or yearly interest calculations. Any payments made are immediately factored into the calculation, taking into account your reduced balance for the next day. This daily interest calculation is particularly advantageous for overpayments, as any additional funds you contribute are instantly reflected in the reduced interest calculation.


This sort of mortgage is for buyers who require financial flexibility or wish to make overpayments to reduce the overall interest on their mortgage.

What is a Buy-to-Let Mortgage?

A buy-to-let mortgage is designed for prospective landlords who intend to purchase a property specifically for renting purposes, rather than as their own residence.

There are several notable differences between buy-to-let mortgages and residential mortgages. Firstly, instead of primarily assessing your personal income, lenders evaluate the potential rental income from tenants. Typically, lenders require the annual rent to be at least 125% of the mortgage repayments.

Buy-to-let mortgages often have higher fees and interest rates compared to regular mortgage products, and the minimum deposit required is typically in the range of 20-40% of the property’s value.

Both interest-only and repayment buy-to-let mortgages are available, although many landlords opt for interest-only mortgages due to the lower monthly payments. However, if you prefer to gradually reduce the amount borrowed, a repayment buy-to-let mortgage is a viable option.

To qualify for a buy-to-let mortgage, lenders typically require a good credit record and income, as you will be taking on the responsibility of a second mortgage.

Most lenders do not consider first-time buyers eligible for buy-to-let mortgages.


This sort of mortgage is ideal for prospective landlords who aim to generate rental income or expand their property portfolio to increase their revenue streams.

What is a Joint Mortgage?

A joint mortgage allows multiple individuals to apply for a mortgage loan together.

Each person named on the mortgage agreement shares responsibility for repayment, and an equitable distribution of ownership needs to be determined among the applicants.

Joint mortgages are available for various mortgage types mentioned in this guide.

While joint mortgages are commonly pursued by couples seeking homeownership, they are also open to groups of more than two individuals. Whether you plan to live with friends or family, receive assistance from a loved one, or engage in a joint investment with a business partner, pooling resources can help you purchase a property.

By applying for a joint mortgage, you can combine your incomes to afford a more expensive property than you would be able to on your own. Lenders will assess the earnings, credit history, and monthly expenditures of each applicant to calculate the combined borrowing capacity.

Also, with two or more individuals, pooling savings for a higher deposit becomes more doable, providing access to a broader range of mortgage products with favourable rates and terms.

However, it is important to engage in discussions with your co-buyers to ensure that the chosen mortgage deal suits everyone’s needs.


This sort of mortgage is for couples or groups of individuals who want to collectively own a property together and are ready to share the responsibility of a mortgage loan.

What is a Guarantor Mortgage?

A guarantor mortgage is a mortgage product designed to help people who are unable to secure a mortgage on their own by involving a trusted person who can take on the responsibility for the loan. If you are facing challenges such as affordability issues, insufficient income, or a poor credit record, a family member or friend can act as a guarantor. Their role is to guarantee to cover any missed repayments, if they occur.

While a guarantor can help you afford a property, it’s important to note that they will not have any ownership rights or be listed on the property deeds. Their involvement is solely for financial responsibility, requiring them to provide security for the lender. This can involve leveraging their own property or depositing a lump sum into a savings account until a specified portion of your mortgage has been repaid.

Most lenders accept either a friend or family member as a guarantor, although some may require it to be a close family member. The guarantor must own their own property (or possess a significant level of equity), have sufficient income to cover repayments, and maintain a strong credit record. Lenders often request proof that the guarantor has sought legal advice before entering into the agreement.

Similar to any mortgage application, the amount you can borrow depends on your financial situation. However, having a guarantor in the equation often provides more options.

For example, a lender might offer a 100% mortgage, enabling you to borrow the full property value without a deposit. Alternatively, they may consider your guarantor’s income when calculating affordability, allowing you to secure a larger loan than you would be eligible for on your own. 


This sort of mortgage is for anyone who requires support to secure a mortgage or obtain a larger loan and has a friend or family member willing to take financial responsibility on their behalf.

The Final Take

Understanding the various types of mortgages available is crucial for anyone embarking on the journey of homeownership or property investment.

From repayment mortgages to interest-only mortgages, fixed-rate to variable-rate mortgages, and the specialised options like offset, buy-to-let, joint, and guarantor mortgages, there is a mortgage product to suit every individual’s unique circumstances and goals.

Remember, when considering mortgages, it is essential to carefully assess your financial capabilities, consider your long-term goals, and seek professional advice from mortgage specialists or financial advisors if needed. Their expertise can guide you through the intricacies of mortgage applications, terms, and conditions, ensuring you make well-informed decisions.

I hope this guide has provided valuable insights into the types of mortgages available, allowing you to make the right decision with confidence.

Richard - Property Investor

Richard is a seasoned property investor with a keen eye for lucrative opportunities. With years of experience in the real estate market, he excels in identifying properties with high potential for growth and returns.