There are a variety of mortgages available for homebuyers in the UK depending on their needs and circumstances. The following article breaks down the different types of mortgages to help you make an informed decision when taking out a mortgage.

There are 2 different payment types available, these are capital repayment mortgage and interest only mortgage. With some lenders, you can have a mix of the two which is part and part. Deciding which one is best for you will depend on your circumstances, the property type and the mortgage type.

What is a repayment mortgage?

Repayment mortgages are the most common mortgages for residential properties. A repayment mortgage is a type of mortgage where you repay some of the capital amount you’ve borrowed, as well as the interest on the loan. This allows you to own your home outright because you have repaid both the capital and the interest.

What is an interest only mortgage?

Interest only mortgages require you to only pay the interest on the mortgage each month, you don't have to repay any of the capital therefore at the end of your mortgage term, you will still have the amount borrowed remaining.

The main advantage of an interest-only mortgage is that your mortgage payments will be lower however you will need to ensure that you have a repayment source to repay the outstanding capital, for example, savings or selling the mortgaged property.

Main mortgage types

When considering a mortgage, there are two main types to choose from: fixed-rate mortgages and variable-rate mortgages. The key distinction between the two is how their interest rate is calculated.

Fixed rate mortgage

This type of mortgage allows borrowers to get a fixed interest rate over a fixed term of the mortgage. This means that regardless of any fluctuations in the interest rate market, your monthly repayments remain the same.

The main advantage of this type of mortgage is that you know exactly what your outgoings are every month and can better plan for them. Fixed rate deals offer more stability compared to other mortgages as the mortgage repayments stay the same each month even when mortgage interest rates change with the Bank of England base rate changing.

Fixed rate mortgage deals are more beneficial for people who are wanting to budget each month for bills and outgoings. If interest rates rise this won't affect your monthly payments in any way, this is the same if interest rates fall, due to being in a fixed period. The main disadvantage to fixed rate mortgages if you repay your mortgage early you may incur an early repayment charge.

Variable rate mortgage

With a variable rate mortgage, your interest rate is not guaranteed; it has the potential to fluctuate and you could be paying more or less each month than when you initially agreed. Unlike with a fixed-rate mortgage option, there's no pre-determined period where the amount will remain constant.

There is more than one type of variable rate mortgage to consider. The interest is calculated differently for each. These are the most common variable mortgage type:

• Standard variable rate (SVR) mortgage
• Tracker mortgage
• Discount rate mortgage

Standard variable rate (SVR) mortgage: The standard variable rate mortgage (SVR) is a lender-controlled interest rate that isn't directly linked to the Bank of England, though it very much relies on their decisions when determining whether or not the rate should increase or decrease. When your fixed mortgage deal expires, usually the bank will move you to their Standard Variable Rate (SVR), potentially resulting in increased payments. It is advisable to review your mortgage before a mortgage rate ends.

Tracker Mortgage: A tracker mortgage follows the Bank of England’s base rate plus a percentage set by the mortgage lender. If the base rate drops, so does your mortgage payment. Although this type of mortgage is great for borrowers who want to benefit from low-interest rates, it can also be risky as payment increases if the Bank of England’s rate rises.

This is a more flexible mortgage as most lenders will allow you to fix your interest rate after a certain amount of time. Tracker mortgages come with more risk as the payment isn't guaranteed each month, however, if the interest rate drops then your payment will go down also.

Discount rate Mortgages: Discounted mortgages offer borrowers a discount off the lender’s standard variable rate (SVR). The amount of discount is fixed, and the reduction is applied whether the SVR is increased or decreased by the lender. This type of mortgage is usually offered for a shorter period, such as two to five years, after which the payments revert to the lender’s standard variable rate. A discount mortgage is a slightly cheaper monthly payment than the lender's SVR.

What is an offset Mortgage?

Offset mortgages link your savings account and your mortgage. The amount you have saved in your savings account is ‘offset’ against your mortgage balance, which reduces the amount of interest you pay. Most lenders will give you the choice of either reducing your monthly payments over the same loan duration or keeping the same level of payments and paying of your loan over a shorter duration. When you offset your savings, you won’t be able to earn interest on them.

Buy-to-let Mortgages

A buy-to-let mortgage is a product aimed at landlords who want to purchase a property to rent out to others, rather than as a residential property to live in. These mortgages are specifically designed to cover the cost of purchasing a property that will be rented out and can come with higher interest rates than standard residential mortgages.

Buy to let mortgages can be both interest only and repayment however a interest only deal is more desirable as the payments are lower. This will help if there are any missed rental payments or if the property is empty.

What to consider when budgeting for monthly payments

You will need to make the decision on whether you want a guaranteed payment amount each month or if you will be willing to take the risk of the interest rates fluctuating.

When budgeting at the start, mortgage fees such as broker and lender fees are important to take into consideration as well as solicitor bills for your purchase. Monthly payments and regular outgoings need to be budgeted for with your mortgage payment so you know what you can afford on a monthly basis.

It is important to note that all of these different types of mortgages have their own specific criteria and requirements. Each mortgage comes with its own advantages and disadvantages, so it is important to consider all options before making a final decision.

It is important to do your research and speak with a mortgage adviser before making any decisions. With the right advice, you can make an informed choice when deciding which type of mortgage is best suited to your needs.

LTC Mortgages will advise you throughout the process when obtaining a mortgage in 2023. If you would like to discuss the different types of mortgage options available to you, contact us today on 0151 662 0188 or email us at [email protected]