Choosing a mortgage is one of the most important financial decisions you’ll make when buying a home. With so many different products available, it can be overwhelming to decide which one suits you best. The right mortgage will depend on your personal circumstances, financial goals, and how much flexibility you want in the years ahead.
In the UK, mortgages come in various forms from fixed-rate and tracker mortgages to interest-only and offset deals. Each has its own features, benefits, and potential drawbacks. Understanding the differences is essential if you want to make a well-informed decision and avoid overpaying over the life of your loan.
This guide explores the main types of mortgages available in the UK, explains how they work, and outlines how to choose the best one for your situation.
What Is a Mortgage?
At its core, a mortgage is a long-term loan used to buy property or land. The property acts as security for the loan, meaning the lender can repossess it if you fail to keep up with repayments. Most mortgages in the UK last for 25 to 35 years, though shorter and longer terms are available.
You’ll typically need to put down a deposit (usually at least 10% of the property value), with the mortgage covering the remaining amount. The loan is then repaid in monthly instalments, which include interest charged by the lender.
Key Types of Mortgages in the UK
1. Fixed-Rate Mortgages
A fixed-rate mortgage means your interest rate, and therefore your monthly repayments, stay the same for a set period, usually between two and five years. Some lenders also offer 10-year fixed rates, and a few even provide 15 or 25-year fixes.
Pros:
- You know exactly how much you’ll pay each month, making budgeting easier.
- You’re protected if interest rates rise during the fixed term.
Cons:
- You won’t benefit if interest rates fall.
- Early repayment charges (ERCs) may apply if you leave the deal before the term ends.
Fixed-rate mortgages are popular with first-time buyers and anyone looking for predictability and financial stability.
2. Tracker Mortgages
A tracker mortgage follows the Bank of England base rate, plus a set percentage. For example, if the base rate is 5.25% and your deal is “base rate + 1%,” you’ll pay 6.25% interest.
Pros:
- Transparent pricing; your rate follows an external benchmark.
- You could pay less if the base rate falls.
Cons:
- Your repayments will rise if the base rate goes up.
- Many tracker deals have limited terms (typically two to five years).
Some tracker mortgages come with a “collar” (a minimum rate) or a “cap” (a maximum rate), though most do not. They’re best suited to borrowers who are comfortable with changing payments and who expect interest rates to remain stable or fall.
3. Standard Variable Rate (SVR)
Each lender has its own SVR: a rate they set independently of the Bank of England base rate. Once your initial fixed or tracker deal ends, your mortgage usually reverts to the lender’s SVR unless you remortgage.
Pros:
- You can leave at any time without early repayment charges.
- Some flexibility if your financial circumstances change.
Cons:
- SVRs are usually higher than introductory rates.
- Lenders can raise or lower the rate at any time.
SVRs are rarely a good long term option, but they may serve as a temporary stopgap while arranging a better deal.
4. Discount Mortgages
A discount mortgage offers a fixed discount off the lender’s SVR for a set period. For example, if the SVR is 7% and you have a 2% discount, your rate will be 5%. If the SVR rises or falls, your rate will change accordingly, but it will always remain at a discount.
Pros:
- Often lower initial rates than fixed-rate deals.
- Can be cheaper if the SVR stays low.
Cons:
- Your payments can go up if the SVR increases.
- The lender controls the SVR, so changes can be unpredictable.
Discount mortgages work best if you’re comfortable with potential rate fluctuations and are confident your lender offers a competitive SVR.
5. Interest-Only Mortgages
With an interest-only mortgage, you only pay the interest each month, not the loan itself. At the end of the mortgage term, you still owe the original amount borrowed, which must be repaid in full (typically through investments, savings, or selling the property).
Pros:
- Lower monthly repayments during the term.
- Potential flexibility for those with irregular income or large cash assets.
Cons:
- You need a robust repayment strategy.
- Many lenders are cautious about offering interest-only loans, especially for residential purchases.
Interest-only mortgages are more common for buy-to-let properties or for high-net-worth individuals with proven repayment vehicles.
6. Offset Mortgages
An offset mortgage links your mortgage to your savings account. The lender deducts your savings from the amount of the mortgage you’re charged interest on. For example, if you have a £200,000 mortgage and £20,000 in savings, you’d only be charged interest on £180,000.
Pros:
- Reduce the amount of interest you pay without losing access to your savings.
- Can help you pay off your mortgage faster.
Cons:
- May have higher initial rates than standard mortgages.
- Your savings don’t earn interest separately.
Offset mortgages are ideal if you have a substantial savings pot and want to use it efficiently while keeping flexibility.
Capital Repayment vs. Interest-Only
When choosing a mortgage, you’ll also decide between two repayment methods: capital repayment and interest-only.
- Capital repayment: Each monthly payment goes toward both the interest and the original loan amount. By the end of the term, your mortgage is fully paid off. This is the most common type for residential buyers.
- Interest-only: You only pay the interest each month. At the end of the term, the full loan must be repaid from other sources. This approach carries more risk and requires a credible repayment strategy.
Choosing the Right Mortgage for You
The best mortgage for you depends on your circumstances, risk appetite, and financial goals. Here are a few key factors to consider:
1. Stability vs. Flexibility
If you want certainty and predictable payments, a fixed-rate mortgage may be the best choice. If you’re comfortable with changing rates and want to take advantage of potential drops, a tracker or discount deal might suit you better.
2. Deposit Size
Some deals, particularly tracker and offset mortgages, may require a larger deposit or lower loan-to-value (LTV) ratio. First-time buyers with a small deposit may be limited to certain fixed or variable rate products.
3. Repayment Ability
If you have a steady income and can afford higher monthly repayments, a shorter fixed-term repayment mortgage might help you clear your loan sooner. Those with fluctuating income or large savings may benefit from the flexibility of an offset or interest-only product.
4. Your Future Plans
If you think you’ll move house or repay your mortgage early, consider the early repayment charges (ERCs) attached to fixed or discounted deals. Some mortgages allow porting (transferring your deal to a new property), but not all.
5. Use a Mortgage Broker
With hundreds of products available from high street lenders, building societies, and specialist providers, finding the right mortgage on your own can be daunting. A mortgage broker, like AMS Mortgages can assess your financial situation and help you access deals that may not be available directly to consumers, especially helpful if you’re self-employed, have bad credit, have previously been refused, or need a bespoke solution.
There is no one-size-fits-all mortgage. What works for one person might be completely unsuitable for another, and the wrong choice could cost you thousands over the lifetime of your loan.
That’s why it’s essential to fully understand the types of mortgages available in the UK and how each one aligns with your financial goals, income stability, and future plans.
Whether you’re a first-time buyer, moving home, remortgaging, or investing in property, taking the time to weigh up your options, and seeking professional advice, is the best way to secure a mortgage that supports your homeownership journey.
