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04 Nov 2020
Jamie Gibbs Jamie Gibbs

What type of mortgage is best for you?

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An approved mortgage application with a set of house keys in the foreground

Before taking the plunge, knowing what kind of mortgage you want is an important step. 

The sheer number of different types of mortgage is enough to make anyone’s head spin. So we’ve listed them all here along with some key points to help you make a better decision on which one is the best for you.

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What types of mortgage are available? 

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? 

 

Mortgage types based on how you repay 

 

Mortgage types based on your interest rate 

 

Mortgage types based on your circumstances 

 

Repayment mortgage 

A repayment mortgage is where you pay off your debt over time. At the end of the mortgage, your debt is clear and you own the property. 

This is the most popular type of mortgage. 

 

Interest-only mortgage 

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

At the end of the mortgage agreement, you still have to pay back the amount you borrowed. Some people do this either by selling the property or having an investment plan. 

You’ll need to agree a repayment plan with the lender before they'll accept you, though. 

 

Variable-rate mortgage 

This is the standard mortgage a lender will have - it's also called the standard variable rate or SVR. 

The figure changes depending on 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. 

 

Fixed-rate mortgage 

A fixed-rate mortgage has a set interest rate for a certain period of time. This is usually between two and five years. 

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. 

 

Tracker mortgage 

A tracker mortgage sets its interest rate above the Bank of England base rate. The interest rate will then rise and fall in line with the base rate. Tracker deals are usually for a fixed period. Once this is over, the mortgage goes back to the standard variable rate.

Your repayments are likely to be less predictable than with a fixed-rate deal. But may initially pay less interest than with a variable-rate deal. 

 

Discount rate mortgage 

A discount rate mortgage is the lender’s standard variable rate, with a discount added. The discount is usually set for a fixed period - after that, you'll switch to the lender's standard variable rate.

Your repayments could go up or down depending on what interest rate the lender decides.

Pay extra attention with discount mortgages. A lender may offer a smaller discount but have a lower variable rate to begin with.

This would make it cheaper than a lender that offers a bigger discount on a higher rate. 

It's worth comparing mortgages to make sure you're getting the best deal. 

 

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 other £140,000. 

 

First-time-buyer mortgage 

First-time buyers have some 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 five-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. 

READ MORE: First-time-buyer mortgages explained 

 

Buy-to-let mortgage 

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

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

READ MORE: Buy-to-let mortgages explained 

 

Joint mortgage 

A joint mortgage is where you and up to three others pool your deposits together. This helps increase your chances of getting a mortgage (and to get better interest rates). 

Your combined income could also help boost your chances of borrowing more. 

The downside is that your finances are tied up with other people. If their credit score is bad, or if they stop making their share of the repayments, it might cause problems. 

 

Self-employed mortgage 

Dedicated self-employed mortgages stopped in 2014. 

If you're self-employed, you should be able to get a regular mortgage. But you’ll need some extra documents including certified accounts and tax records. 

So long as you can prove that you have a steady income and can make the repayments, you shouldn’t have a harder time than normal getting a mortgage. 

 

Bad-credit mortgage 

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

A fixed-rate mortgage can help since you’re better able to budget your repayments. It might be worth looking into building your credit back up before you take on a big debt like a

mortgage. 

READ MORE: How to improve your credit score 

 

Guarantor mortgage

Guarantor mortgages are when you’re unable to get a mortgage on your own. They’re not something to enter into lightly.

Here, someone else acts as your guarantor, and agrees to shoulder the debt if you can’t make your repayments.

But there's extra risk all around. Guarantors could have their property repossessed if you don’t make your payments.

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