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Mortgages generally fall into two categories: fixed-rate deals (which guarantee your rate for a set number of years), and variable rate deals (where your rate can go up or down depending on economic conditions).
This guide explains how each type of mortgage works, and offers advice on some of the specialist mortgages available for people who might struggle to get a standard home loan.
Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms and conditions of a provider before committing to any financial products.
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Fixed-rate mortgages are the most common type of loan taken out by homebuyers and by homeowners remortgaging.
With a fixed-rate mortgage, you'll pay the same interest rate for a set number of years, meaning your monthly repayments will remain consistent regardless of what happens to the Bank of England base rate.
Borrowers most commonly take out two-year or five-year fixed-rate mortgages, although three, seven, 10, and even 15-year fixed terms are available.
At the end of your fixed period, you'll need to remortgage. If you don't, you'll be moved to your lender's standard variable rate (SVR), which is usually much more expensive.
Tracker mortgages are variable rate deals that 'track' the Bank of England base rate plus a set percentage.
For example, the base rate is currently 4.25%. So if your tracker is 'base rate plus 1%', you'll pay a rate of 5.25%.
If the base rate goes up, so too will your monthly repayments. If it goes down, you should pay less each month - but this isn't always the case.
This is because some tracker mortgages come with a 'collar', which means the rate can only fall to a set level. This means if the base rate plummets, your payments might not follow suit.
As with fixed-rate mortgages, trackers have an introductory deal period (most commonly two years). After this, you'll be moved on to your lender's SVR if you don't remortgage.
Discount mortgages are variable-rate deals that charge your lender's SVR minus a fixed margin.
So if your lender's SVR is 5% and your deal charges the SVR minus 2%, you'll pay a rate of 3%.
If the lender puts up its SVR (for example, if the base rate goes up), your payments will go up accordingly. But if the SVR goes down, you'll pay less.
Discount mortgages usually come with introductory deal periods of two years.
As we mentioned above, each lender has its own SVR that it can set at whatever level it wants. This rate is usually much higher than the rate you'll be able to get on a fixed, tracker or discount mortgage.
SVRs don't change very often. They're not directly linked to the base rate, but are often affected by it.
For example, if the base rate goes up by 0.25 percentage points, lenders don't have to increase their SVR by the same margin, but many will.
In the table, we set out the pros and cons of different mortgage types.
| Pros | Cons | |
|---|---|---|
| Fixed-rate mortgages | During the deal period, your interest rate won't rise, regardless of what's happening to the wider market. A good option for those who want the stability of a fixed monthly payment. | If interest rates in the mortgage market go down, you may end up paying more than you would on a variable-rate deal. |
| Tracker mortgages | If the base rate goes down, your monthly repayments will usually drop too (unless your deal has a collar set at the current rate). Your interest rate is only affected by changes in the Bank of England base rate, not changes to your lender's SVR. | You won't know for certain how much your repayments are going to be throughout the deal period. You'll only benefit from a drop in the base rate if the terms of your mortgage allow it - not all do. |
| Discount mortgages | Your rate will remain below your lender's SVR for the duration of the deal. When SVRs are low, your discount mortgage could have a very cheap rate of interest. | Your lender could change its SVR at any time, so your repayments could become more expensive. |
Whether you should choose a fixed or variable-rate mortgage will depend on whether:
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When you take out a mortgage, it will either be on an interest-only or repayment basis.
With an interest-only mortgage, you only pay the interest each month, meaning you have to pay off the entire loan at the end of the mortgage term.
With a repayment mortgage, which is by far the more common type of deal, you'll pay off a bit of the loan as well as some interest as part of each monthly payment.
When you buy a property with someone else - for example, a partner, friend or family member - you'll take out a joint mortgage.
Both parties will be named on the mortgage agreement and property deeds, and thus will be jointly responsible for making payments.
Taking out a mortgage with someone else should significantly increase your borrowing power.
Lenders usually allow you to borrow a maximum of 5 times your annual income. So if you earn £30,000 and are buying alone, you might be able to borrow up to £150,000. If your partner also earns £30,000, that figure doubles to £300,000.
By combining your savings you might also be able to put up a larger deposit, which will allow you to get a better mortgage rate.
Lenders will run a credit check on each applicant before granting a mortgage. If one party has a poor credit score, it could impact the lender's decision.
Taking out a joint mortgage will create a financial link with the other person, so consider this carefully before rushing in.
Another word of warning - a missed mortgage payment will show up on both credit reports, regardless of whose fault it was.
Whatever the reason you want to end your joint mortgage, there are a few options:
Sometimes your circumstances will mean that you need or may be eligible for a specialist mortgage. Some of the main types are as follows:
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