Types of mortgages

Before buying your own property, knowing what mortgage to get is an important step.

We’ve explained some of the more common types of mortgages in this guide, to help you get an idea of what one to get.

These are some of the main types of mortgages available:

• Repayment mortgage
• Interest-only mortgage
• Fixed-rate mortgage
• Variable-rate mortgage
• Offset mortgage
• First-time buyer mortgage
• Buy-to-let mortgages

The type of mortgage you get largely depends on your individual circumstances. That's why it can be worth speaking to a broker who can compare mortgages to help you find the best deal.

What type of mortgage is best for you?

Your mortgage type depends on a few factors. How do you want to pay it back? What does your interest look like? What kind of homeowner are you?

Repayment types

Repayment mortgage

A capital repayment mortgage is where you pay off a bit of the mortgage loan amount as well as the interest each month.

You make monthly repayments over an agreed length of time (known as the mortgage term) which is typically between 25 and 30 years, but can vary. At the end of the mortgage term, your loan is fully repaid and you own the property.

This is the most popular type of mortgage for residential properties.

Interest-only mortgage

An interest-only mortgage is where you only pay back the interest of the mortgage each month.

At the end of the mortgage term, you still have to pay back the total loan amount that you initially borrowed, known as the Capital Amount. People do this in different ways, such as:

• Selling the property
• Having an investment plan
• Using pension funds

Your lender won't accept you for an interest-only mortgage unless they're comfortable with your repayment plan.

Interest-only mortgages are no longer commonly offered for residential homes. But they are often used for buy-to-let properties.

Part-and-part mortgage

Part-and-part mortgages are considered to be a combination of a repayment and interest-only mortgages. They can also be referred to as part-interest and part-repayment mortgages.

This type of mortgage allows you to pay off just a portion of your mortgage until the end of the mortgage term, like you would a repayment mortgage. But, the remainder of the mortgage would then need to be paid all at once at the end of the mortgage term, like with an interest-only mortgage.

How much capital you pay off monthly and how much you pay off at the end of the term can be agreed with by your mortgage lender. Your lender is likely to look at your circumstances to determine the amounts.

Mortgage rate types

Fixed-rate mortgage

A fixed-rate mortgage has a set interest rate for a certain period of time. This is usually between 2 and 5 years, but can be more.

Fixed-rate mortgages help you budget your money by having consistent monthly payments.

The good thing is your interest rate doesn’t go up if the Bank of England base rate rises. But it also doesn’t go down if the base rate drops.

Variable-rate mortgage

There are 3 types of variable-rate mortgages:

• Standard variable rate (SVR)
• Tracker
• Discount

An SVR is the default mortgage a lender has. If your fixed-rate mortgage or introductory rate variable deal is coming to an end, you can fall back onto the SVR - unless you remortgage.

The figure can be affected by the Bank of England base rate, but it’s set by the mortgage lender. This means the rate can go up or down at any time and by any amount. These types of mortgage usually have the highest interest rates.

A tracker mortgage sets its interest rate above the Bank of England base rate. The interest rate will then rise or fall in line with the base rate. Some tracker deals are set for a fixed period, once the deal is over your mortgage goes back to the SVR. You can get a lifetime tracker deal set to last the whole of your mortgage term, unless you change the deal. Your repayments are likely to be less predictable than with a fixed-rate deal. But you may initially pay less interest than with a variable-rate deal.

A discount rate mortgage has a variable interest rate set below the lender’s SVR and will rise and fall with it. This means your repayments could go up or down whenever the SVR does, but the discount size will remain the same. For example, if your lender's SVR is 7% and your mortgage discount is 2%, your initial rate is 5%. If the SVR falls to 6%, with a discount still at 2%, your rate will then be at 4%. The discount is usually set for a fixed period - after that, you're then switched to the lender's SVR.

What other types of mortgages are there?

Offset mortgage

An offset mortgage ties your mortgage debt and your savings together. You use your savings to lower your interest rate.

Let's say you have a £150,000 mortgage, and £10,000 in savings. The first £10,000 of your mortgage debt is interest-free, and you'd pay interest on the remaining £140,000.

If you link your mortgage to your savings account, it means you won't earn any interest on your savings. But depending on your circumstances, you might be better off as you could save more in interest with an offset mortgage than the interest you'd earn on a savings account.

First-time buyer mortgage

A first-time buyer mortgage is a mortgage for those who've never owned a home, either in the UK or abroad.

There aren't any specific mortgages for first-time buyers, but there are a few schemes available to help them get a mortgage:

• Shared ownership – you get a mortgage on a percentage of the property, and pay rent on the rest.
• Equity loan – a 5-year interest-free loan from the government to boost your deposit.
• Right to buy – if you’re renting in a council house, you could buy it at a discounted price.

If neither of these schemes work, there are also other alternatives for first-time buyer mortgages to help them get on the property ladder, including:

• Joint mortgages - is when you take out a loan for a property with 1 or more people, allowing you to combine money for a deposit and combine income for repayments.
• Joint-borrower-sole-proprietor (JBSP) mortgages - this is ideal if you want other people to contribute to repaying your mortgage, but still be the sole owner of the property.
• Guarantor mortgages - typically a parent or guardian provides their savings or property as collateral against your loan, so if you can't make the repayments the lender goes to the guarantor.
• Family assisted mortgage - there are different types of this mortgage, but essentially the mortgage allows you to use income or security from a family or friend to help you buy a home.

Buy-to-let mortgage

A buy-to-let mortgage is for landlords who intend to rent their property out.

Buy-to-let mortgages usually need a larger deposit of around 20-40% of the property price, and most are interest-rate only deals. But, there are some cases where you can get a repayment version from a lender.

Generally, interest rates tend to be higher on a buy-to-let mortgage compared to a standard mortgage. And the amount you can borrow depends on how much you expect to get back in rent.

As well as a standard buy-to-let mortgage, you can get:

• Limited company buy-to-let mortgage - these are specialist types of mortgages for landlords who own their property through a company.
• Consumer buy-to-let products - this mortgage type is for accidental landlords, for example you may have inherited a property that you want to rent out. The FCA doesn't regulate most buy-to-let mortgages as they're seen as products for businesses, but they do regulate consumer buy-to-let products.
• Portfolio mortgages - for landlords with multiple properties, aiming to grow their property portfolio, allowing them to have all their buy-to-let mortgages under a single mortgage.

Self-employed mortgage

There aren't any specific self-employed mortgages. If you're self-employed, you can apply for the same deals as someone in regular employment. But you’ll need some extra documents for the application, including certified accounts and tax records.

So long as you can prove that you have a steady income and can make the repayments, you should be able to be accepted for a mortgage.

But some lenders may be more willing to accept you than others, depending on your circumstances, so it can be worth getting the advice of a mortgage broker.

Bad-credit mortgage

Getting a mortgage if you’ve had bad credit can be more difficult. You may need a larger deposit, and your interest rates might be higher than for others.

There are some specialist brokers out there who can help those with bad credit find lenders who are more likely to consider them.

It might also be worth looking into building your credit back up before you take on a big debt like a mortgage.

 

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