20 October 2019

Mortgage types

Whether you’re stepping onto the property ladder for the first time or you’re moving up it, you’ll most likely be using a mortgage to buy your new home. Finding the best mortgage starts at understanding the different types of mortgage available to you. So here’s a quick, basic guide to mortgage types to help you decide on the most suitable mortgage type for your current situation.

Fixed rate mortgages

What is it?
The interest you’re charged stays the same for a fixed amount of time. Typically this is between 2 and 5 years, depending on your mortgage lender. When this period ends, you’re normally switched to the lender’s default rate. Make sure you check this before signing up to your mortgage deal.
Why is a fixed rate mortgage a good idea?
You can rest in the knowledge that your monthly payments will stay the same for a fixed amount of time, regardless of what’s happening in the wider market. This takes away a lot of stress and you can organise your finances without worrying about your monthly payments increasing.
A fixed rate mortgage is great if you want the stability of a fixed monthly payment.
Why could it be a bad idea?
If interest rates fall, you won’t benefit at all because you’re locked into your fixed rate. So you may end up paying more than you would in a different mortgage type.
Top tips
Make sure you check the length of your fixed rate deal and make sure you’re happy to be locked in for that period of time. Sometimes there is a charge for leaving the deal early, so be sure to check the entire deal before signing up to it.

Standard variable rate mortgages

What is it?
This type of mortgage entirely depends on your mortgage lender. Each lender sets their own standard variable rate and can adjust or change it as and when they like.
Buyers who choose a fixed rate mortgage often end up on a standard variable rate once their fixed period has ended by default, even though it may not be the best rate for them.

A standard variable rate mortgage (SVR) will last as long as your mortgage, or until you decide to take out another mortgage deal.
Why is a standard variable rate mortgage a good idea?
If your mortgage lender sets a low interest rate, then you could essentially be on a better mortgage rate than someone who opts for a fixed rate. The changes in interest rates usually depend on the base rate set by the Bank of England.
If you opt for a SVR, you can leave at any time. Also, you can overpay your monthly payments.
Why would it be a bad idea?
Because you’re relying solely on your mortgage lenders rates, they could change at any time during your loan. This makes it more difficult to budget because you could unexpectedly be charged a higher amount than the previous month.
Top tips
To prepare for any increase in monthly payments, it’s wise to have some savings at the ready, just in case you have an unexpected increase in payment.

Discounted rate mortgages

What is it?
This mortgage type is a discount off the lender’s standard variable rate. It only applies for a certain length of time, usually 2 or 3 years.
Why is a standard variable rate mortgage a good idea?
Your rate will start off cheaper which will in turn make your monthly repayments smaller.
Also, if your lender lowers their SVR, you’ll pay less each month!
Why would it be a bad idea?
This is a variable rate, so the amount you pay each month could change if your lender changes their SVR.
Top tips
Shop around for the best rate. This may seem obvious, but discounted rate mortgages can trick you out. Check the interest rate as well as the discount rate. If the interest rate is low but the discount rate is also low, you might be better off choosing a higher interest rate and a higher discount rate. 

Tracker mortgages

What is it?
A tracker mortgage moves in line with another interest rate (usually the Bank of England’s base rate, then adding a fixed amount on top). If the base rate goes up or down, so does your interest rate.
Usually there last between 2 to 5 years, though some lenders offer deals that last until your mortgage is paid off or if you decide to switch to another mortgage deal.
Why is a tracker rate mortgage a good idea?
If the rate tracking goes down, so will your repayments. So you could be in for cheaper repayments than another mortgage type, depending on the base rate you’re tracking.
Your lenders SVR doesn’t affect your monthly payments, it’s just the base rate you’re tracking (ie the Bank of England).
Why would it be a bad idea?

If the rate rises, so will your repayments. Your repayments depend on the other interest rate, so your repayments could rise or fall at anytime.
You do have uncertainty throughout your deal because you won’t know exactly how much your payments are going to be throughout your deal. You’ll only benefit from a drop in the base rate if the terms of your mortgage allow it. Make sure your mortgage lender allows it before signing up to any deal.
Top tips
Be sure to check the length of your mortgage deal as some lenders will charge an early repayment charge if you want to switch mortgage deals before your deal ends.

Capped rate mortgages

What is it?
A capped rate mortgage moves in line with the lenders SVR, but with a cap on how high the interest rate can rise. So if your lenders SVR decreases, so will your repayments. This type of mortgage isn’t as common nowadays, but it’s important to understand your options nevertheless.
Why is a capped rate mortgage a good idea?

Your rate won’t rise above a certain level, so you know you won’t pay over a certain amount each month.
Plus, your payments could be lower if your lender’s SVR falls.
Why would it be a bad idea?
Usually, the cap tends to be set quite high, meaning that there is leeway for high monthly repayments. Compared to other mortgage types such as fixed rate mortgages, the rate tends to be higher.
Also, your lender is in complete control of how high or low the mortgage rates are. So if it rises, your repayments could at any time.
Top tips
Make sure you’re aware of how high the cap can rise, so you can check you could afford it if the level reached the top of the cap.
Also, if you opt for this mortgage type, be sure you can afford the highest rate by saving in advance.

Flexible mortgages

What is it?
Flexible mortgages let you overpay and underpay, take payment holidays and make lump-sum withdrawals. This flexibility is very attractive for a lot of buyers. It could be very beneficial if you come into some money or receive a lump-sum that you’d like to contribute towards your mortgage.
Why is a flexible mortgage a good idea?
A flexible mortgage is a good option for a number of reasons. If you get a promotion and want to increase your monthly payments, you can do. If you receive a lump sum, you can pay this towards your mortgage easily. If you can’t pay your usual amount one month and you’d like to decrease a months payment, you can. If you’re self employed and have a fluctuating income, a flexible mortgage is ideal.
Basically, a flexible mortgage is great if you’re going to want to change the amount you pay each month.
Why would it be a bad idea?
Flexible deals can be more expensive than conventional ones, so be sure to read the small print before signing up to your deal.
There is usually a limit to the amount you can overpay. Typically it’s 10% each year, but this does depend on your mortgage lender.

Top tips
Double check if there is a limit to the amount you can overpay. If there is, check how much it is and see if this fits in with your current financial situation. A flexible mortgage may sound attractive, but it's important to check the terms and conditions before it's too late.

Next steps

Now you briefly understand the different types of mortgage out there, it's a good idea to seek advice from a mortgage advisor. Even though carrying out your own research is reccomended, a mortgage advisor will most likely have more experience and expertise which can help when assessing your current situation.
Read our beginners guide to mortgage advisors here.