Different types of mortgages explained

There are many different types of mortgages available, so it’s important to fully understand your choices and know which one will suit you best.

We have outlined the different types of mortgages to help you gain insight on how they work. However, it is advisable that you talk through the options with a mortgage adviser who can help you fully understand the jargon, rates and how your mortgage works.

First, let’s understand repayment structures

There are two main types of repayment structures: Capital repayment and interest-only.

With a capital repayment mortgage, your monthly repayments will be calculated so that by the time your loan term ends, you will have paid off all your debt. Your payments will cover both the actual debt and the interest.

To find out how much you would likely have to pay each month, check out our mortgage calculator

Interest-only mortgages are the most common method of borrowing morning for buy to let mortgages to buy investment properties but are no longer common for residential mortgages unless the applicant can prove a credible plan to repay the capital loan. It means you only pay off the interest each month over your agreed term – leaving you with the full debt to be paid in one lump-sum at the end.

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What is a fixed rate mortgage?

This is the most popular rate currently. The mortgage lender will guarantee the interest rate you pay by fixing it for an agreed period. This is usually up to 10 years with the most common being 2 & 5 year fixed rates. This means changes to interest rates will not affect your mortgage during the deal period.

This gives you certainty of how much your mortgage will cost during the deal – and your payment will not change, even if mortgage interest rates change.

There are usually penalties for exiting the fixed rate early although most mortgages will allow you to make overpayments of up to 10% of the mortgage balance each year.

What is a variable rate mortgage?

 With a variable rate mortgage, your mortgage rate will move up and down. The biggest reason for this is changes to the UK economy. So in times of economic growth, we tend to see higher interest rates – and in a downturn interest rates are cut to encourage spending.

Variable rates fall into the three following categories:

What is a Tracker mortgage?

 A tracker mortgage is where the interest rate you pay follows the Bank of England base rate. Your interest rate is an agreed percentage above the base rate. For example, if the base rate is 0.25 percent and your tracker is set at 1 percent above it, you pay 1.25 percent.

What is a standard variable rate mortgage (or SVR)?

An SVR mortgage rate is controlled by the mortgage lender and they can move the rate when they like. They will usually roughly follow the Bank of England’s base rate and will typically be between two to five percentage points above it.

If interest rates are cut, your rate may also drop. But this isn’t guaranteed, as lenders decide what your rate moves to.

Think carefully and get mortgage advice

There is so much to think about when finding the right mortgage for you. You should make sure you are fully equipped with all the information on what is available and don’t rush in to applying for the most attractive deal.

A Linear mortgage adviser can take you through all the pros and cons of each product – and help you make the most informed decision. Use the Linear eligibility checker to start the process of finding a mortgage and book a call with our dedicated advisers.

Your property may be repossessed if you do not keep up payments on your mortgage. Linear usually charges a fee for mortgage advice. The precise amount will depend on your circumstances but may range from £399 to £599 up to a maximum of 1% of the mortgage amount. The fee is payable when an application is submitted to a mortgage lender and is non-refundable.