What are the types of mortgage in the UK? (2024)

There are many types of mortgages offered in the UK. It is therefore important that you know which type of mortgage will best suit your financial situation.

For instance, do you want to have a fixed budget ahead of time? Do you have the means to pay the interest only throughout and then the principal loan at the end? How confident are you that the Bank of England’s base rate will rise (or fall)?

The answers to each of these questions will narrow your search. To help you make a more informed decision on which mortgage will work best for you, here is everything that you need to know about the types of mortgages in the UK.

What are the different types of mortgages UK?

There are many different types of mortgages available in the UK. Knowing the difference between mortgage types is key to securing the one that makes the most sense for you financially. While each of these mortgages functions similarly, various factors such as fees, repayment methods, and mortgage rates in the UK can vary.

While there are others, let’s take a quick look at the main types of mortgages in the UK:

1. Interest-only mortgage
2. Repayment mortgage
3. Fixed-rate mortgage
4. Variable-rate mortgage

Here is a closer look at the different types of mortgages in the UK.

1. Interest-only mortgage

For an interest-only mortgage, you pay the interest on the home loan every month but do not make any repayments toward the capital you have borrowed. In other words, you must repay the loan amount at the end of the loan period, meaning you must ensure you are able to repay the entire debt at that time. This is different to repayment mortgages, for which the amount is repaid incrementally along with the interest.

Compared to any other mortgage product, interest-only mortgages require considerably lower monthly repayments. With those leftover funds, however, it is important that you ensure you have accumulated enough to repay the capital at the end of the loan term. If not, you may have to sell your home to pay for what you owe. And because you will be paying back the interest on the entire loan, as opposed to a decreasing amount, an interest-only mortgage often costs more, over time, than a repayment mortgage.

Interest-only mortgages are usually for home buyers who want to benefit from lower payments every month, but who is also confident they will have the money necessary to repay the mortgage in its entirety when it is due.

We go more in-depth on the benefits and drawbacks of an interest-only mortgage here.

2. Repayment mortgage

A repayment mortgage is when you repay some of the capital amount that you have borrowed, plus some of the interest on the home loan. The goal is to repay the initial loan amount as well as interest over the agreed-upon term. This allows you to build equity and, over time, own your property outright.

If you move during the duration of the home loan, you can pay off the original mortgage and then take out another one. Another option is to transfer your current mortgage to your new property, a process called porting your mortgage.

Most types of mortgages in the UK are technically repayment mortgages, with the exception being interest-only mortgages. Repayment mortgages are best for those home buyers who want to build equity in their property and own the home at the end of the repayment period.

3. Fixed-rate mortgage

With a fixed-rate mortgage, which is a type of repayment mortgage, the interest rate is set for a specific amount of time and will remain unaffected by Bank of England (BoE) base rate increases or market fluctuations. The fixed interest rate is also known as the introductory rate. After you have taken out a fixed-rate mortgage, you are locked into that introductory rate for a certain period. If you leave prior to the ending of that period, you will have to pay exit fees.

Usually, the fixed-rate period, which is also called the initial-rate period, is for two years, three years, or five years. In this period, you will know exactly how much you must pay every month, which will remain unchanged until the fixed period is over. The obvious benefit of this is that you will know exactly how much you must budget for, which is especially appealing for first-time buyers who prefer to know how much to budget for the first years of their home loan.

One of the drawbacks of a fixed-rate mortgage is that you face a significant penalty if you switch before the initial period ends. You will also be unable to benefit in the even that interest rates decrease during that period. (However, you are also protected from increasing rates.)

After your initial period ends, you will likely be switched to the standard variable rate offered by your lender, which is often higher. One option most homeowners go for at this point is to remortgage so they can get a better deal.

A fixed-rate mortgage is great for home buyers who want security and consistency so they can budget more accurately at the start of their mortgage. Also, if you believe the base rate is going to increase soon, a fixed-rate mortgage will protect you.

4. Variable-rate mortgage

Different from fixed-rate mortgages, the interest rates for variable-rate mortgages can change at any time, either increasing or decreasing. In other words, there is no fixed period where the rate is locked in. How much money you must pay every month can fluctuate, due to the Bank of England’s changing base rate, among other factors.

There are also different types of variable-rate mortgages. With each one, the interest rate is calculated differently, meaning there are pros and cons to each depending on your financial needs. Here is a look at the four main types of variable-rate mortgages in the UK:

• Standard variable-rate mortgage
• Tracker mortgage
• Discount mortgage
• Capped-rate mortgage

Standard variable-rate mortgage

The lender sets the interest rate for a standard variable-rate (SVR) mortgage, which is not linked directly to the BoE. (However, in most cases, the BoE impacts whether the rate rises or falls.) Your lender can increase or decrease your rate each month, meaning that it may be difficult to budget since your monthly payments are subject to change.

The upside to an SVR is that you have the freedom to overpay as well as leave the mortgage without being penalized. It is also the rate that lenders transfer borrowers to after their fixed-rate deal is completed, meaning you might pay a higher interest rate if you fail to remortgage in time.

Tracker mortgage

With a tracker mortgage, the interest rate is equal to the BoE’s base rate, plus some percentage points set by the lender. If the base rate is 0.5%, for example, you may pay that plus 3% for a rate of 3.5%, meaning that when the base rate decreases, your mortgage rate will track down and you end up paying less. (Keep in mind this also happens if the base rate increases.)

Tracker mortgages are good for anyone who is confident that the base rate is set to decrease but who can also comfortably pay more if the rate rises again over the long run.

Discount mortgage

For a discount mortgage, you pay a reduced amount from the lender’s standard variable rate. With the amount of the discount being fixed, the reduction is applied to whether the lender’s SVR rises or drops. If the SVR is set at 4.5%, for example, and your deal applied to a fixed 1.5% discount, you will pay a 3% mortgage rate. If, on the other hand, your lender decreases the SVR to 4%, your rate is decreased to 2.5%.

Like a tracker mortgage, most discount mortgages are available only for an introductory term. After that period, you are switched to the lender’s SVR. Most deals are also stepped, meaning you get the most favourable discount for a set term prior to switching to a lesser discount for the rest of the introductory period. Some discount mortgages are also capped, meaning there is a rate they cannot drop below or rise above.

Discount mortgages work well for first-time home buyers who want a cheap rate for the introductory period and who can pay more if the SVR rises.

Capped-rate mortgage

Capped-rate mortgages are variable-rate mortgages that do not increase above a certain rate, or cap. Capped-rate mortgages are often available as tracker mortgages or SVR, I.e., they follow the models of these types of mortgages but with a cap built in.

One clear benefit to capped-rate mortgages is that repayments never rise above a level you are unable to afford. It should be noted, however, that many capped-rate mortgages have a collar, which is a cap that prevents the rate from dropping below a certain point. This means that you may be protected from high rates but also not be able to benefit from lower rates.

What is the most popular type of mortgage in the UK?

The most popular type of mortgage in the UK is likely a fixed-rate mortgage, especially for first-time home buyers. A fixed-rate mortgage means you have the same interest rate and payment amount for a certain period, usually from two years all the way up to 10 years, in some cases. Following this initial period, you will be switched to your lender’s standard variable rate, which is often higher.

The benefit fixed-rate mortgages are they make it easier to budget, because they offer predictable, consistent monthly payments. This is especially convenient for first-time home buyers who are still getting used to budgeting and for anyone who plans to live in their current home long-term.

Will your deposit have an impact on how much lenders will let you borrow? 🏠
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Our UK mortgage repayment calculator gives a quick indication of what your monthly repayments will be for different types of mortgages. https://t.co/NMqSpYzQnX
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— Tony Flynn Mortgages (@FlynnMortgages) February 23, 2022

How do British home mortgages work?

For most British home mortgages, you get the home loan and repay the amount that you have borrowed—plus interest—in monthly instalments over a pre-set period. While some mortgages in the UK have longer or shorter terms, 25 years is a common period. Until you have repaid it in full, the mortgage is secured against your home, meaning that, if you fail to repay the loan, the lender may repossess your property.

In Britain, you can either get a mortgage on your own or get a joint mortgage with one or more other buyers.

Types of mortgage UK: Loan vs. mortgage

As mentioned, a mortgage is a type of loan that is secured against your home. A loan, on the other hand, is more broadly a financial agreement between two parties. You receive a loan from a lender or a creditor and agree to pay back the amount, as well as interest on that amount, usually in monthly instalments over a specific term.

There are numerous types of loans, some secured—like a mortgage—and others unsecured. An unsecured loan simply means you are not required to use an asset (like a house) as collateral. Unsecured loans are typically smaller and come with higher interest rates.

To find the right mortgage for you, it is important that you understand the types of mortgages in the UK. Before committing yourself to getting your mortgage, do your research, such as checking in on what the best mortgage lenders in your areacan do for you.