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Mortgage types explained

Find out about the different types of mortgage and understand the pros and cons of fixed-rate mortgages, tracker mortgages and more.

In this article
Mortgage types Pros and cons of fixed-rate mortgages, tracker mortgages and discount mortgages Interest-only and repayment mortgages  Mortgage features to look out for

Choosing the right type of mortgage could save you thousands of pounds, so it's really important to understand how they work. 

After taking out your mortgage you'll pay an initial interest rate for a set period of time. This rate can be fixed (guaranteed not to change) or variable (may increase or decrease). 

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Your home may be repossessed if you do not keep up your mortgage repayments.

 

Mortgage types

Below, you can find out how each mortgage type works, then compare the pros and cons of fixed-rate, tracker and discount mortgages in our table.

Variable-rate mortgages

There are two main types of variable-rate mortgage: tracker mortgages and discount mortgages.

Tracker mortgages 

With a tracker mortgage, your interest rate 'tracks' the Bank of England base rate (currently 0.5%) – for example, you might pay the base rate plus 3% (3.5%).

In the current mortgage market, you'd typically take out a tracker mortgage with an introductory deal period (for example, two years). After this, you are moved on to your lender's standard variable rate.

However, there are a small number of 'lifetime' trackers where your mortgage rate will track the Bank of England base rate for the entire mortgage term.

Discount mortgages

With a discount mortgage, you pay the lender's standard variable rate (a rate chosen by the lender that doesn't change very often), with a fixed amount discounted. For example, if your lender's standard variable rate was 4% and your mortgage came with a 1.5% discount, you'd pay 2.5%.

Discounted deals can be ‘stepped’; for example, you might take out a three-year deal but pay one rate for six months and then a higher rate for the remaining two-and-a-half years.

Some variable rates have a 'collar' – a rate below which they can’t fall – or are capped at a rate that they can’t go above. Make sure to look out for these features when choosing your deal to ensure you understand what you're signing up to. 

Fixed-rate mortgages

With fixed-rate mortgages, you pay the same interest rate for the entire deal period, regardless of interest rate changes elsewhere. 

Two- and five-year deal periods are the most common, and when you reach the end of your fixed term you'll usually be moved on to your lender's standard variable rate (SVR). 

Whether you should choose a fixed or variable-rate deal depends on whether you think your income is likely to change, whether you prefer to know exactly what you will be paying each month and whether you could cope if your monthly payments went up.

Standard-variable-rate mortgages 

Each lender has its own standard variable rate (SVR) that it can set at whatever level it wants – meaning that it's not directly linked to the Bank of England base rate. 

The average SVR in July 2018 was 4.72%, according to Moneyfacts. This is higher than most mortgage deals currently on the market, so if you're currently on an SVR, it's worth shopping around for a new mortgage. 

Lenders can change their SVR at any time, so if you're currently on an SVR mortgage, your payments could potentially go up - especially if there are rumours of the Bank of England base rate increasing in the near future. 

Pros and cons of fixed-rate mortgages, tracker mortgages and discount mortgages

Pros and cons of different mortgage types  
  Pros Cons Average rate*
Fixed-rate mortgages

Pros of 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 on a tight budget who want the stability of a fixed monthly payment.

Cons of fixed-rate mortgages

If interest rates in the mortgage market go down, you may end up paying more than you would on a variable-rate deal.

2.99%
Tracker mortgages

Pros of tracker mortgages

If the base rate goes down, your monthly repayments will drop too (although this is unlikely to happen in the current market).

Your interest rate is only affected by changes in the Bank of England base rate, not changes to your lender's SVR.

Cons of tracker mortgages

You won't know for certain how much your repayments are going to be throughout the deal period.

2.77%
Discount mortgages

Pros of 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.

Cons of discount mortgages

Your lender could change their SVR at any time, so your repayments could become more expensive.

2.84%

*Average rates according to Moneyfacts. Data sourced 5 September 2018

Whether you should go for a fixed or variable-rate mortgage will depend on whether:

  • You think your income is likely to change
  • You prefer to know exactly what you'll be paying each month
  • You could manage if your monthly payments went up

For expert advice on the best type of mortgage for your financial situation, call Which? Mortgage Advisers on 0800 197 8461.

Interest-only and repayment mortgages 

When you take out a mortgage it will either be an interest-free or repayment mortgage, although occasionally people can have a combination.

With an interest-only mortgage, you just 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 mortgage, you'll pay off a bit of the loan as well as some interest as part of each monthly payment.

Mortgage features to look out for

Flexible mortgages

Flexible mortgages let you over and underpay, take payment holidays and make lump-sum withdrawals. This means you could pay your mortgage off early and save on interest.

You don't normally have to have a special mortgage to overpay, though; many 'normal' deals will also allow you to pay off extra, up to a certain amount – typically up to 10% each year.

Other types of flexible mortgages include offset mortgages, where your savings are used to offset the amount of your mortgage you pay interest on each month. 

Flexible deals can be more expensive than conventional ones, so make sure you will actually use their features before taking one out.

Cash back mortgages 

Some mortgage deals give you cash back when you take them out.

But while the costs of moving can make a wad of cash sound extremely appealing, these deals aren't always the cheapest once you've factored in fees and interest. Make sure you take the total cost into account before choosing a deal. 

Correct as of date of publication.

 
 

 

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