Mortgage Types Explained

Choosing the right mortgage is one of the most important financial decisions you will make when buying a home. With so many different products available, it can be difficult to know which one suits your circumstances best. This guide explains the main types of mortgage available in the UK, their advantages and disadvantages, and when each type might be most appropriate.

Before diving into the different types, it is worth understanding a few key terms. The loan-to-value ratio (LTV) is the amount you borrow as a percentage of the property value. A lower LTV (meaning a larger deposit) generally gives you access to better interest rates. The mortgage term is the total length of the mortgage, typically 25 to 35 years. The interest rate determines how much you pay on top of repaying the amount borrowed.

A fixed-rate mortgage locks your interest rate for a set period, usually two, three, five, or sometimes ten years. During this period, your monthly payments stay exactly the same regardless of what happens to the Bank of England base rate or the wider economy.

Pros: Payment certainty makes budgeting straightforward. You are protected from interest rate rises during the fixed period. Fixed rates are widely available across all LTV bands, and competition between lenders means rates are often very competitive.

Cons: If interest rates fall, you will not benefit until your fixed period ends. Early repayment charges (ERCs) apply if you want to switch or pay off the mortgage during the fixed period — these can be substantial, often 1% to 5% of the outstanding balance. Longer fixes tend to have slightly higher rates than shorter ones.

A tracker mortgage has an interest rate that follows the Bank of England base rate plus a set margin. For example, if the base rate is 4.5% and your tracker is set at base rate plus 1%, your mortgage rate would be 5.5%. When the base rate goes up or down, your payments move accordingly.

Pros: If the base rate falls, your payments reduce automatically. Tracker mortgages are transparent — the rate moves in line with an independent benchmark. Some trackers have no early repayment charges, giving you the freedom to switch or overpay without penalty.

Cons: Your payments can increase if the base rate rises, making budgeting harder. There is no upper limit on how high payments could go unless your tracker has a "cap" (capped trackers are relatively rare). The uncertainty can be stressful for those on tight budgets.

Tracker mortgages are available as lifetime trackers (for the full mortgage term) or for fixed periods (such as a two-year tracker). A two-year tracker typically has a lower starting rate than an equivalent two-year fix, but carries the risk of rate increases during that period.

Every lender has a Standard Variable Rate, which is their default rate. When your fixed-rate or tracker deal ends, you will automatically move onto the SVR unless you remortgage to a new product. SVRs are set by the lender and can change at any time, though they tend to broadly follow the Bank of England base rate.

Pros: No early repayment charges, so you are free to overpay, switch, or pay off your mortgage at any time. This can be useful if you are planning to sell your property soon or want maximum flexibility.

Cons: SVRs are almost always higher than the best fixed or tracker rates available. The rate can change at the lender's discretion, and lenders are not obligated to pass on base rate cuts. Staying on the SVR for an extended period can cost you thousands of pounds in unnecessary interest.

A discount mortgage offers a set percentage off the lender's SVR for a fixed period. For example, if the SVR is 7% and you have a 2% discount, your rate would be 5%. Unlike a tracker, the discount is applied to the SVR rather than the Bank of England base rate.

Pros: You benefit from any reduction in the SVR. Starting rates can be lower than equivalent fixed rates. Some discount deals have no early repayment charges.

Cons: Because lenders set their own SVR, your payments could increase even if the base rate stays the same. The SVR can change at any time and is less transparent than a tracker linked to the base rate. Budgeting is more difficult because you cannot predict exactly what your payments will be.

An offset mortgage links your savings account to your mortgage. Instead of earning interest on your savings, the savings balance is "offset" against your mortgage balance, and you only pay interest on the difference. For example, if you have a £200,000 mortgage and £30,000 in savings, you would only pay interest on £170,000.

Pros: You effectively earn a return on your savings equal to your mortgage rate, which is tax-free. Your savings remain accessible for emergencies. Over time, offsetting can significantly reduce the total interest you pay and help you pay off your mortgage faster.

Cons: Interest rates on offset mortgages tend to be slightly higher than standard fixed or tracker rates. You need substantial savings for the offset to make a meaningful difference. Your savings will not earn any interest, which could be a disadvantage if savings rates are higher than the benefit of offsetting.

With an interest-only mortgage, your monthly payments only cover the interest on the loan. You do not repay any of the capital during the mortgage term, meaning you still owe the full amount borrowed at the end. You need a credible repayment strategy to pay off the capital when the term ends.

Pros: Monthly payments are significantly lower than repayment mortgages. This can improve cash flow and allow you to invest the difference elsewhere if you believe you can achieve a better return.

Cons: You must have a realistic plan to repay the full capital at the end of the term. Lenders have strict criteria for interest-only mortgages and typically require a large deposit (usually 25% or more). If your repayment strategy fails, you could be forced to sell your home. Interest-only mortgages are generally only available to borrowers with significant equity, savings, or investment income.

A repayment mortgage (also called a capital and interest mortgage) is the most common type. Each monthly payment covers both interest and a portion of the capital, so by the end of the mortgage term, you will have paid off the entire loan and own your home outright.

Pros: You are guaranteed to own your home outright at the end of the term, provided you make all payments. Each payment reduces your outstanding balance, building your equity in the property. This is the safest and most straightforward way to finance a home purchase.

Cons: Monthly payments are higher than interest-only. In the early years, a larger proportion of your payment goes towards interest, with capital repayment accelerating as the balance reduces over time.

The right mortgage depends on your individual circumstances, risk appetite, and financial goals. Consider the following factors when making your decision:

Budget certainty: If you want to know exactly what your payments will be each month, a fixed-rate mortgage is the best choice. The longer the fixed period, the greater your certainty.

Risk tolerance: If you are comfortable with payments going up and down and believe interest rates may fall, a tracker mortgage could save you money. However, you must be able to afford higher payments if rates rise.

Savings: If you have significant savings, an offset mortgage could save you thousands in interest while keeping your money accessible.

Time horizon: If you plan to move within a couple of years, a short-term fix or a product with no early repayment charges gives you flexibility. If you are settling down for the long term, a longer fix provides stability.

Whatever type you choose, an independent whole-of-market mortgage broker can search thousands of products to find the best deal for your specific situation. Many brokers offer a free initial consultation, and their fees are often offset by the savings they find.