Different Mortgage Types Explained - How to Choose a Mortgage

 

Getting a mortgage is a huge financial decision, so it’s important to make sure that you are ready for one. Choosing the right mortgage can save you money on interest, whilst choosing one that isn’t right could result in you unable to make payments and going into debt. 

A good way to get to know the market is to learn the difference between types of mortgages, so that you can make your decision confidently. 

 

What is a mortgage?

 

A mortgage is a loan that is taken out by an individual, or two or more people, in order to buy a property. 

When you apply for a mortgage, you need to put down a percentage of the cost of the property value as a deposit with your mortgage lender — the rest of the amount will be covered by your mortgage.

Most lenders require at least a 10% deposit in order to secure a mortgage. The higher the deposit amount that you are able to put down, the less ‘risky’ the borrower is deemed to be. This also means that you will pay less, as you will have lower interest rates. 

 

Repayment mortgages

With a repayment mortgage, you will pay back the money you have borrowed as well as interest on the capital that is left to pay off every month. When you finally reach the end of your mortgage term, you will have paid off the entire loan.

 

Interest only mortgages

Over the term of your loan, you won’t have to pay off the mortgage, only the interest that is accumulated monthly — meaning that your monthly payments are much lower. Remember though, when you come to the end of the mortgage term, you will have to pay the total amount in full.

Read our guide on 'Repayment vs Interest Only Mortgages'

 

Fixed rate mortgages

 

With a fixed rate mortgage, the amount of interest that you pay back is set — meaning that your interest rate won’t increase or decrease for a set amount of time.

You can have a fixed rate mortgage with an initial period of 2, 3 or 5 years, but after this time has expired, your rate will change.

If you decide that you want to remortgage to find a new fixed deal at the end of your initial period, that is possible — otherwise, you will be placed on a standard variable rate (SVR) mortgage.

 

Standard variable rate (SVR) mortgages

 

SVR is a standard interest rate mortgage, or a mortgage outside of its deal period (read our guide on 'What is a Mortgage Standard Variable Rate?'). Each lender sets their own SVR, which means that in theory, the amount that you pay could go down or up every month.

There are many types of SVR mortgages:

 

Discount rate mortgages

With a discount rate mortgage, you receive a discount on the lender’s SVR over a set period of time. This is a type of variable rate, with the amount that is paid each month subject to change if the lender alters their SVR.

 

Tracker mortgages

If you take out a tracker mortgage, you’ll likely pay a different amount each month. Many lenders use the Bank of England base rate to determine what you will pay, with a fixed amount added on top.

 

Flexible mortgages

A flexible mortgage can be a good option, as the terms allow you to overpay, underpay or even take a payment holiday if you need to. But, for the privilege of this flexibility, it’s common that you will pay a higher interest rate per month.

 

Offset mortgages

An offset mortgage is another type of flexible mortgage. This allows you to use your savings to reduce the amount of interest that you pay on your mortgage.

Open a current or savings account with your lender and then link your account and your mortgage together. For example, If you have £5,000 in your savings, and £95,000 to pay on mortgage, you will only need to pay interest on £90,000 of your mortgage. 

 

Types of mortgage

 

Learning about the different types of mortgage is a great way to familiarise yourself with the market and work out exactly what you need from your lender. 

Whether you’re well on the way to applying for a mortgage or just starting out, remember that you can find a mortgage broker online at MyLocalMortgage.