A Guide to the Different Types of Mortgages in the UK

Comparing many of the different types of mortgage available to property buyers in the UK.

Mortgages can be a headache for anyone, especially if you are new to the property market! There are several types of mortgages, with different types being more beneficial in certain scenarios. Thankfully, in this mini guide, we’ll provide you with all the required information you’ll need regarding the different types of mortgages available in the UK.

Variable-rate mortgages

One of the most common types of variable rate mortgages is known as Standard Variable Rate (SVR) mortgages. These are mortgages that are set at the default interest rate set individually by the lender. Whilst these mortgages aren’t actually offered out, the SVR is what a mortgage deal is switched to once it has expired or is out of its deal period.

In terms of interest rate, variable rate mortgages may vary depending on how much you borrowed for the mortgage and the current cost of interest. Variable rate mortgages are usually based around a combination of the lenders own criteria and the Bank of England’s base rate.

Interest-only mortgages

Mortgage calculator

As indicated by the name, with interest-only mortgages, you only repay the interest on the loan, you won’t actually be paying off the mortgage. It’s usually the case that interest-only mortgages offer lower monthly repayments that cover the interest but won’t actually cover any of the mortgage. Once the term ends, you’ll then have to pay off the total amount remaining.

The caveat of choosing to secure an interest-only mortgage is that you’ll need to be certain you will have the money to pay off the rest of the mortgage once your loan period has ended. If you don’t have the funds to pay off the rest, you may be forced into selling your property. Lenders will often ask for proof of how you plan to execute repayments before they agree to offer you an interest-only mortgage.

Tracker mortgages

Tracker mortgages are another type of variable rate mortgages and are subject to change each month. They follow a specific interest rate that determines what you pay every month, which can fluctuate between higher and lower amounts.

Capped rate mortgages

Capped rate mortgages have a cap on how high the interest can rise. The rates are usually higher when compared to tracker mortgages, but on the plus side, they aren’t subject to change.

First-time buyer mortgages

Sometimes, lenders will offer deals exclusively to first time buyers to encourage people to get on the property ladder. First time buyers are still free to choose any of the regular types of mortgages, however, they may also be able to take advantage of exclusive schemes or mortgage types. Some of the mortgage types for first-time buyers are often offered in conjunction with government backed schemes such as Help to Buy.

High percentile mortgages

Although rarer than they used to be, high percentile mortgages are starting to creep into the housing market once again. They are commonly known as 95% or 100% mortgages and are offered to those who don’t have a sufficient deposit available. Following the covid19 pandemic, 5% deposits have become more commonplace again, especially for those looking to buy for the first time.

Discount rate mortgages

Discount rates are offered below the lender’s SVR; however, these rates are subject to fluctuation. If the SVR is stable, discount rate mortgages can be ideal but if the market is volatile, then the rates of the mortgage can go up as well as down.

Offset mortgages

Offset mortgages allow you to pay off bigger sums in order to pay less interest. This type of mortgage isn’t suitable for everyone, but for those with large amounts of savings, offset mortgages may be the preferable option. With offset mortgages, you can reduce the amount of interest you are charged by linking your current or savings account with your lender.

Flexible (flexi) mortgages

Flexi mortgages tend to suit those whose monthly incomings change month to month, for example, those who are self-employed. Flexible mortgages allow you to pay different amounts each month, however, they are usually offered at an increased interest rate.

Buy-to-let mortgages

These types of mortgages are usually offered to those who are looking to purchase property with the aim of renting it out to others rather than living in the house themselves. The rates on buy-to-let mortgages can often be higher, and the lender will often determine the amount based on how much rent will be received through letting the property out.

How to improve your mortgage chances

For some people, it can be one of the biggest challenges when to successfully apply for a mortgage. Thankfully, there are a few changes you can make which will help to improve your chances of getting a mortgage. We have covered these tips in a previous post, which will hopefully be able to give you a better understanding of how to better your chances.

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