What different types of mortgages are there?
In the UK, there are several types of mortgages available to homebuyers, including:
Repayment mortgage
Your monthly payments cover both the loan and the interest. Over time, your balance decreases until you've paid off the entire mortgage.
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Interest-only mortgage
You only pay the interest on your loan each month. At the end of the mortgage term, you'll need to pay off the loan in full. Many lenders require proof of a repayment vehicle to repay this at the end of the term.
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Fixed-rate mortgage
Your interest rate is fixed for a set period of time, typically between 2 and 10 years. This provides stability and predictability in your monthly mortgage payments, but you may miss out on potential savings if interest rates fall.
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Variable rate mortgage
Your interest rate can fluctuate over time. This type of mortgage is set independently by each bank of buildings society. There is more uncertainty about your monthly payments over time. If the interest rate increases, your mortgage payment will increase. Likewise if the interest rate decreases your monthly payments may decrease.
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Tracker mortgage
Your interest rate tracks the Bank of England's base rate, plus a set percentage. This means that your interest rate can go up or down depending on changes in the base rate.
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Discount mortgage
You get a discount on the lender's standard variable rate for a set period of time. This can provide lower initial payments, but your payments may increase after the discount period ends.
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Offset mortgage
You can use your savings to reduce the amount of interest you pay on your mortgage. Your savings are held in an offset account, which is linked to your mortgage, and the balance of your savings is subtracted from the amount you owe on your mortgage when calculating interest. This can help you pay off your mortgage faster and save money on interest.
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These are some of the most common types of mortgages available in the UK, but there may be other variations and combinations of these types of mortgages available from different lenders. At Your Mortgage Room, we can help you to understand the features and risks of each type of mortgage and before helping to choose the best option for your individual circumstances.