Checked by Connor Fitzgerald, Founding Director
Understanding mortgage types is something many people think they’ll never be able to achieve. Confusing. Daunting. Overwhelming. Indeed, the world of mortgages is often associated with words like these, and with 100s of new terms, forms to fill in, and financial jargon to decipher. it’s no wonder why. That’s why we’ve deemed it important to break down all of the industry terms and lingo that go hand in hand with financial decision-making.
At The Levels Financial, our team of expert mortgage advisors have been working in the industry for years and have helped hundreds of people apply for a mortgage who were initially terrified by the process. Part of helping clients overcome this is providing them with the information to understand the different mortgage types available. So, in this guide, we’re going to break down the different types of mortgages that are currently available on the UK mortgage market. (Strap yourself in!)
A fixed-rate mortgage is perhaps the most common and well-known mortgage type. Mortgage rates (the interest rate you pay on your mortgage loan) are set at a fixed price for a set amount of time.
For example, at the moment, the current Bank of England base rate is 5.25%. Typically, fixed-rate mortgages are calculated by multiplying the loan amount by the interest rate. Which is then adjusted per the term you decide on. Fixed-rate mortgages are often available for two to five years. (You can read more about the base rate in our blog post, ‘August 2023 interest base rate rising – how can this impact you?’)
| Pros | Cons |
|---|---|
| If the interest rate is low, it’s an easy way to capitalise on the lower rate, saving money on your monthly payment. | If the interest rate is high, you will be ‘locked’ in with the higher interest rate for the extent of your agreement. |
| Great for budgeting, you know what you’re paying each month, with no nasty surprises. | If interest rates fall, you won’t be able to benefit from the decrease and save money each month. |
| Great for long-term homeowners, as fixed-rate mortgages are usually locked in for a set amount of years, for long-term homeowners this is an easy and effective way to organise mortgage repayments. | If you want to leave your fixed deal before the agreed end of the term, you may have to pay an early repayment charge. |
Interest-only mortgages are cost-effective monthly repayment loans. Instead of paying the loan sum back to the lender gradually, every month you will only repay the interest each month. Instead, the large lump sum of the mortgage is paid back in full when the mortgage term comes to an end.
This mortgage type is an option for those who have a clear plan in place to save enough money to then pay the full mortgage amount back at the end of the term. The monthly interest rate that you will be paying is based on the Bank of England base rate (find out more about that in our blog post, ‘base rate increases to 5% – what this means for you’).
| Pros | Cons |
|---|---|
| Low monthly repayments, as you will only need to repay your loan interest each month. | You could pay more interest overall than with other mortgage types, as your interest does not decrease with your loan repayments. |
| If your investments, savings or financial circumstances improve or work well, you may be able to pay back your loan faster, without having to sell or remortgage. | You will need to organise and manage your funds for the full mortgage repayment as well as paying back interest each month. |
| If you have knowledge of any money that you may ‘come into’ i.e. inheritance or trust funds, an interest-only mortgage allows you to purchase a property now and pay off the property once the term comes to an end, or you come into your money. | If your repayment funds rely on investments, house prices, or pension funds, it may not make enough to pay off your mortgage. If this happens it would be your responsibility to organise payment. |
Track record mortgages is a new mortgage type which has recently become available to help renters become first-time buyers. At The Levels Financial, we have all you need to know about track record mortgages.
Track record mortgages allow users to get on the property ladder, track record mortgages are available for a 35-year term on a five-year fixed rate with a maximum loan of £600,000. Unlike other mortgage types, track record mortgages take into account a 12-18 month track record of no missed or late payments.
| Pros | Cons |
|---|---|
| Don’t need to save up for a deposit, taking the pressure off of saving whilst also paying for rent, bills and other life necessities. | The lack of deposit when purchasing the house means the homeowner has reduced equity when making the purchase. |
| This mortgage type currently doesn’t have any additional fees to pay when applying for it. | Fixed-rate interest rate is currently higher than the average five-year rate. Meaning that homeowners on this mortgage will pay more over time. |
| As the track record mortgage doesn’t require a guarantor, this makes it easier for some to own their own homes. | Due to the recommended monthly mortgage payment (these should be no more than the average of their last six months of rental payments), could limit some buyers on how much they can borrow |
Standard variable rate mortgages, otherwise known as SRV mortgages don’t have a ‘fixed rate’ set by the Bank of England. Instead, they have a rate that is set by the lender. While the variable rate isn’t directly linked to the Bank of England’s base rate, in most cases, that is the primary influence on whether it increases or decreases.
Unlike fixed-rate mortgages, the standard variable-rate mortgage can rise and fall with the financial market of the time, ie, as the interest rate or base rate changes. The Standard variable rate mortgage is also the type of mortgage that your lender will move you to after your fixed rate deal has come to term.
| Pros | Cons |
|---|---|
| Standard variable rate mortgages give you the freedom to overpay your mortgage without having to pay fees. | Standard variable rate prices may fluctuate in line with the Bank of England base rate changes, which could mean an increase in payments. |
| Could have lower initial payments, compared to other loans available. | As the payments can fluctuate with the financial circumstances, such as the rise and fall of the base rate, stated by the Bank of England, payments may increase past your financial means |
| Standard variable rate mortgages can decrease over time, leading to lower monthly repayment chargers. | While standard variable rates may be the right deal for you, our team of mortgage advisors will be able to work with you to find a potentially better deal for your circumstances. |
Discounted rate mortgages are similar to a standard variable rate mortgage, with one difference; you will be paying a slightly reduced version of your lender’s standard variable rate. The discount will be a fixed reduction applied to the standard variable rate.
Regardless of whether the rate is increasing or decreasing, the discount will be applied. For example, if your lender’s standard variable rate is at 4.5% but their discount rate has a fixed rate of 1%, you will be paying 3.5% interest on your loan. This discount rate will be applied whether the base rate increases or decreases.
| Pros | Cons |
|---|---|
| This is a cheaper rate than the standard variable rate that your lender offers. | Repayments can fluctuate which could make it harder for you to create a monthly budget. |
| You could benefit from interest rate reductions. | Can come with early repayment charges, so if you pay back your mortgage early, to move deals, for example, you could be hit with a fee. |
| The added discount, on this discount rate mortgage, means that if the base rate was to increase, you wouldn’t be paying the full interest amount. | Your rate can change whenever the lender makes changes to their standard variable rate, not always following the base rate changes. |
Tracker mortgages are often listed among the cheaper deals that are currently available on the mortgage market. This is typically because the mortgage will ‘track’ the Bank of England’s base rate. However, whilst a tracker mortgage tracks the base rate, it will normally stay a specific percentage point higher than the rate.
For example, if the base rate was at 1% a tracker mortgage would be paying around 2-3% higher, depending on the lender’s markup. Tracker mortgages can be set for the full term of your mortgage, or you can choose to leave at any point.
| Pros | Cons |
|---|---|
| Your tracker mortgage rate will automatically fall when the Bank of England announces interest rate decreases. | Your monthly repayments could change, making it harder to budget your months or years |
| Your lender will be unable to increase your tracker rate more than the Bank of England’s base rate./td> | If the base rate rises, so do your payments (with the additional percentage markup as well). |
| Often don’t have early repayment charges, making it easier to move home or remortgage when you need to without incurring additional fees. | If you choose to go for a lifetime tracker mortgage it could be difficult to exit the mortgage without additional fees. |
For more information about how to apply for a mortgage, see our blog post: ‘5 steps to increase your chances of mortgage approval’, or speak to one of our expert mortgage advisors.
Similar to standard variable rate mortgages, capped rate mortgages are where your monthly payments may fluctuate due to base rate changes or changes set by your provider. However, unlike other variable rates, there is a cap on how much your lender can charge you. The cap applies to both the maximum amount that lenders can charge you as well as the minimum (sometimes known as a collar rate).
This mortgage type will often be set for a fixed term, normally between two to five years, where at the end of your term you can then choose to change mortgage deals and providers.
| Pros | Cons |
|---|---|
| With the upper limit cap on repayments, you will be able to protect yourself against increasing mortgage payments. | With the limit (collar) on decreasing rates, you may be paying more than you would on other mortgage rates compared to other mortgage deals. |
| Knowing the upper limit cap, and the highest possible amount you could be paying allows you to budget accordingly and not be met with any nasty surprises further down the road. | Capped mortgages often have more fees associated with them when setting them up. |
| Your payments could also decrease over time, helping you save money. | As it is a fixed-term mortgage, you may have to pay exit fees if you wish to change your loan further down the line. |
Offset mortgages are where the mortgage is linked with a savings account. While the money in your linked savings account isn’t used to pay off your mortgage, it is used to lower the interest that you will be charged on your monthly repayments.
Essentially, this mortgage type works by ‘offsetting’ the repayment amounts by what is in your linked savings account. For example, if you have a £100,000 mortgage and you have £10,000 in your savings account, you will only pay interest on £90,000 of that mortgage loan. Saving you 10% on the monthly interest, in this scenario.
| Pros | Cons |
|---|---|
| You could save more money, with your reduced interest rate payments, than you could when paying repayments on different mortgage loan types. | Your savings won’t earn any interest if they are being used for an offset mortgage. |
| You won’t have to pay tax on the amount of interest you save. | Your savings may be more beneficial being used on a larger deposit, rather than offsetting interest. |
| You can still withdraw and invest money into your savings account whilst it’s being used to offset your mortgage. | Interest rates could be higher on your offset mortgage compared to other mortgage deals’ interest rates. |
Joint Borrower Sole Proprietor (also known as Guarantor mortgages) is a mortgage type where you use someone else’s property or home as collateral or safety for your mortgage. If the borrower is unable to make repayments on their mortgage, the lender will then ask the joint borrower to make those payments. If they are unable, the lender may then forcibly sell the borrowers’ property.
Joint borrowers who are used on mortgages do not own any of the property and their names won’t be on the deeds.
| Pros | Cons |
|---|---|
| If you’re struggling to save for a deposit, a joint borrower mortgage helps buyers get on the housing market. | Some lenders only allow family members to be a guarantor, which could cause issues if you’re unable to find a member of your family who can be a joint borrower. |
| Having a joint borrower with a good credit history or high income could help increase your borrowing capacity. | If things go wrong, you could affect both your credit score and your joint borrowers’ credit score. |
| Allows buyers to purchase a property outside of their affordability, helping them buy a larger house or in a more desired area. | The age of your guarantor could potentially shorten the mortgage term available. |
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To find out more about what a credit rating is, or how you can improve yours, see our blog post, ‘What can affect your credit score?’ Or to see our top tips for saving for a mortgage during the cost of living crisis, see our blog post ‘how to save for a mortgage in the cost of living crisis’.
Flexible mortgages are a style of mortgage where you, the borrower, has flexibility on how much you pay back. Meaning you could pay back your mortgage in fewer repayments compared to other mortgage agreements. You can do this by either paying additional lump sums or increasing your monthly repayments. Reducing the overall time it takes you to pay back, whilst also reducing the amount of interest you pay.
| Pros | Cons |
|---|---|
| You can change how much you pay back. With flexible mortgages, you can choose to overpay or underpay (only if you’re already ahead of schedule) your mortgage. | You could have increased interest rates on your repayments. |
| You can take payment holidays, where you can skip monthly payments for up to six months. Useful for maternity leave or unplanned accidents or illnesses. | Most lenders only let you have a payment holiday if you’re already overpaid. Interest rates will also still accrue whilst you take a payment holiday, meaning your payments may increase when you start paying again. |
| Some lenders will allow you to make your overpayments into a ‘reserve account’ which you can withdraw from at any time if your financial situation changes. | There could be better deals available on the market to better suit your financial needs. |
It goes without saying that there are a lot of mortgage types available in the UK and knowing which is suited to your individual requirements and affordability can be overwhelming. This is why our dedicated team of mortgage advisors are available, six days a week, with Saturday and evening appointments available, to help you find the right mortgage rate for you.
Get in touch with our team today, to book your free initial consultation and learn which mortgage type could be right for you. Either emails us via admin@thelevelsfinancial.co.uk or call our team on 01458 772 040.
Because we always have your best interests at heart, you need to know that your home may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1%, but a typical fee is 0.3% of the amount borrowed.
