Different types of mortgages: which one is right for you?

From fixed rate to variable deals, here’s what you need to know about the different types of mortgages available to help find the best deal for you.

With interest rates rising sharply since December 2021, securing the right mortgage could save you thousands of pounds.

In this article, we explain the pros and cons of the main types of mortgage.

• What is a mortgage?
• From fixed to variable rate mortgages: five types to choose from
• Should you take out a long-term mortgage?
• Which type of mortgage should I get?
• How do I find the best mortgage for me?

Read more: What is a 100% mortgage and can I get one?

What is a mortgage?

If you are new to mortgages, it helps to understand the terminology.

In the table below we outline some of the terms you tend to see when shopping for a mortgage:

Fixed rate mortgage	A type of mortgage deal where the interest rate remains the same for a set number of years
Variable rate mortgage	A type of mortgage deal where the interest rate fluctuates in line with the Bank of England base rate.There are different types of variable rate, such as a tracker mortgage
Mortgage term	This is the entire lifespan of the loan — we explain more about mortgage terms in this section
Loan-to-value	When you take out a mortgage the loan will be a proportion of the property’s value, known as loan-to-value. Find out more about LTVs in this section

If you’re shopping for a mortgage, here are the main questions you need to ask yourself:

• Do I want to lock in an interest rate for a number of years or am I comfortable with my repayments changing? 
• If I decide to fix my mortgage deal, how long for?
• How long do I want the mortgage term to last? 
• What loan-to-value ratio do I expect? (This will be determined by the size of your deposit and the value of the property you want to buy. We explain this in more detail in this section.)

Times Money Mentor can help you choose a mortgage with our free comparison tool.

What are the different types of mortgages?

Below we go into detail about the most common types of mortgage.

1. Fixed rate mortgages

With a fixed rate mortgage, you will pay a set rate of interest for a certain number of years.

Interest rates have been rocketing upwards since December 2021. In August, the Bank of England rose the base rate for the 14th successive time to 5.25% – something that has been held up to now (February 2024) – which is the highest level since March 2008 – the year of the financial crisis.

However, mortgage rates have dipped in recent months, and this could continue. If it does, you may regret committing to paying a fixed rate. Read more about whether UK mortgage rates will go down in 2023?

• Two and five year fixes are the most common
• When that deal expires, you roll onto your lender’s standard variable rate (unless you have arranged to switch to a new deal by that point)
• It may be possible to fix your rate for up to 40 years, though there are risks of doing this

Pros: Your monthly payments will be predictable for a fixed number of years, which can give you peace of mind and a better ability to budget as interest rates rise.

Cons: You won’t benefit if interest rates fall and you could end up paying more than if you had been on a variable interest rate.

2. Tracker mortgages

A tracker mortgage is a type of variable rate mortgage that is based on the Bank of England’s base rate plus a certain percentage on top – say, 1%.

For example, if your mortgage had a rate of 6% before the 0.25% base rate increased in August, then your rate would have gone up by 0.25% to 6.25% to reflect the rise.

In essence, the monthly repayments with this kind of mortgage will get bigger or smaller depending on whether the base rate goes up or down.

If the rate is low, you also enjoy a cheap rate, but when it rises your monthly payments will increase too.

A tracker mortgage deal normally runs for two to five years. However, there are a few lifetime tracker mortgages that you can take out for the entire term of your home loan. 

Should I get a tracker mortgage?

Having a tracker mortgage would mean you benefit from future falls in the base interest rate should they happen, as expert analysis suggests. However interest rates have been rising fast.

Pros: If the official rate falls, so will your mortgage payments.

Cons: If the Bank rate rises, your mortgage payments will go up too. Plus, you’ll lack the certainty that comes with a fixed rate mortgage of knowing exactly how much your repayments will be for a certain period of time.

3. Standard variable rate

This is your lender’s default rate and is usually an expensive way to borrow money. As the name suggests, it’s another type of variable rate mortgage.

You usually automatically move onto your lender’s standard variable rate mortgage when the fixed or variable deal you have been on comes to an end. That is, unless you choose to switch products with the same lender or remortgage to another lender.

Some points about standard variable rates:

• Each lender has its own SVR that it can set at whatever level it wants
• The SVR is usually the rate that you are moved to once your deal finishes rather than one you sign up to from the outset.
• The rate is typically more expensive than others on the market

Pros: It gives you freedom as a standard variable rate SVR mortgage doesn’t lock you in so you can leave at any time without paying exit fees.

Cons: Your rate is higher than most other mortgage deals and can change at any time. Plus, as with a tracker mortgage, you lack the certainty you’d get with a fixed deal.

4. Discounted mortgages

A discounted mortgage is a cut-price version of your lender’s standard variable rate. The discount is applied at a set percentage for a period of time, usually two or three years.

For example, if your lender’s SVR is 7% and your mortgage has a 1.3% discount, you will pay 5.7%.

Where a discount mortgage differs from other variable-rate deals is that while the cost of an SVR may be influenced by changes in the base rate, the lender is free to make its own decision on whether to re-price it. 

Pros: The rate starts off cheaper, which keeps monthly payments lower. If the lender cuts its SVR, you will pay even less. Another benefit of SVRs is that you generally won’t face any early repayment charges if you repay all or part of your mortgage before the end of the term.

Cons: Lenders are free to set their own SVR and they can increase (or decrease) it at any time, irrespective of what happens to the base rate. If that happens, your payments will change accordingly. You need to consider if you are happy with this lack of certainty. Plus, as with a tracker mortgage and SVR, you lack the certainty you’d get with a fixed deal.

5. Interest-only mortgages

An interest-only mortgage is where you only pay the interest each month rather than repaying the loan itself.

This usually makes it cheaper as your monthly payments are lower than on a repayment mortgage.

However, when you come to the end of the term you will still have a large loan to pay off.

Pros: Monthly payments are cheaper as you are not paying off the cost of the property. Your debt depreciates in value over the long term because of inflation

Cons: Unless you save money or sell the property you may struggle to pay off the debt at the end of the term.

If you are looking to get on the property ladder, make sure you check out our guide to buying your first home.

Which type of mortgage should I get?

Most borrowers tend to opt for a fixed-rate deal of between two and five years. This is because it makes their repayments predictable for the length of the deal.

However, that’s not to say that will be the best option for you.

For example, if the base rate of interest were to fall, you would miss out on reduced monthly repayments, but of course, the opposite would be true with a rate increase.

This means that you may choose to opt for a tracker mortgage, with analysts generally anticipating the base rate to start falling in the latter stages of this year. Should this happen, those on tracker mortgages would see an instant fall in the rate of interest they pay.

So weigh up what works for you – certainty or greater flexibility.

You also need to consider the length of the mortgage term.

While 25-year terms have tended to be the most common, rising house prices have led to more people opting for 30-year mortgage deals to lower their monthly repayments.

However, with mortgage rates soaring over the last year, it may not be the best time to commit to such a long-term deal.

Choosing the right mortgage can save you hundreds or even thousands of pounds, whether you are buying a home or remortgaging. Looking for a lender? Check out the best mortgage lenders.

Getting a mortgage can be tough, so we have tips to help you secure one.

Should I get a fixed rate mortgage?

If you want your monthly repayments to be predictable for a set number of years, a fixed rate mortgage is usually a good idea.

It gives you the certainty of knowing what your repayments will be for as long as the deal lasts. This in turn can make it easier to budget and means you won’t get an unexpected bill if interest rates increase.

Mortgage rates have increased substantially since December 2021. Find out how mortgage rates have changed. But it might be a good idea to lock in a rate now as it is possible they will continue to go up.

Here are some tips to consider:

• Only opt for a fixed deal if you plan to keep your house for that length of time, which will usually be two to five years. If you decide to leave before your deal ends, you could be stung with an early-repayment charge.
• If you think you might sell your home before the deal ends, it’s probably not a good idea to opt for a longer-term one.

Find out more about whether now is a good time to buy.

Is a standard variable rate mortgage a good option?

The SVR is your lender’s default rate. It is usually far more expensive than opting for a fixed rate or tracker deal, so it’s unlikely to be the best option.

The SVR can also fluctuate and won’t necessarily track the base rate like tracker mortgages do.

People don’t usually sign up to a standard variable rate mortgage. In most cases you will roll onto the SVR automatically if your fixed deal has expired. That is, if you don’t arrange a new deal before your old one elapses.

If you are close to the end of a deal, you can avoid the SVR by remortgaging instead, or by switching to a different mortgage with the same lender, called a product transfer. Find out more about whether now is a good time to remortgage.

Are guarantor mortgages a good idea?

A “guarantor mortgage” works by getting a parent or another family member to agree to cover your mortgage repayments should you not be able to make them.

With that guarantee in place, you might be able to borrow more and to take the first step onto the property ladder with a small deposit.

This might be an option to consider if, say, you only have a little in savings, or if you have a low income, or not much credit history.

But you need to go into such an arrangement with caution; if you fall behind on repayments, your family members will be required to cover them. This is a big commitment to make. 

Before signing up, think carefully about whether a guarantor mortgage is right for you. Read more about buying your first home and other help that might be available.

Should you take out a long-term mortgage?

The longer the mortgage term, the lower your monthly repayments. This could allow you to be more comfortable financially each month while you pay it off.

However, there are downsides to taking out an ultra-long mortgage as it will take you decades to pay it off and it will cost you much more in the long run. This is because you will be paying interest for longer.

By comparison, the shorter the mortgage term the quicker you pay off the mortgage and fully own your own home. But of course your monthly repayments will be larger, so it’s important to make sure you don’t over-stretch yourself.

Additionally, with mortgage rates having increased significantly during 2022, locking into a fixed rate mortgage for the long-term now may see you pay above the odds for decades down the line. However, there is no way of knowing exactly what will happen to mortgage rates in the future.

A third of first-time buyers take out mortgages with long terms of more than 30 years.

We crunched the numbers on a £250,000 repayment mortgage with an interest rate of 5%. The table below shows how the mortgage would differ depending on the term:

Term	Monthly payment	Total interest over full term
25 years	£1,461	£188,443
30 years	£1342	£233,139
35 years	£1,262	£279,922
40 years	£1,205	£328,636
50 years	£1,135	£431,208

But if at any time you feel you would like to get the debt off your back sooner than that, and you have built up a reserve of money you could start overpaying your mortgage.

This could shorten the amount of time it takes to pay off your loan in full. Read: should I overpay my mortgage?

You could also remortgage onto a new deal with a shorter term. Here’s what you need to know about remortgaging.

How do I find the best mortgage?

Here are some steps you can follow to help you secure the best mortgage:

• Do your research: compare the best mortgage deals before you commit
• Find out which lenders offer the best customer service using our guide
• Use mortgage calculators: there are plenty of these available online to help you understand how changes in interest rates could affect your monthly repayments and the overall cost of the loan
• Make use of this guidance to improve your chances of getting a better deal
• Speak to a mortgage broker: ideally one that’s able to search the whole of the market rather than being restricted to a small number of lenders or products.
• Exclusive deals: some brokers will have exclusive deals that are only available through their company, so ask them about these

Check out our article to compare the best mortgage deals.

Do I need a mortgage broker?

Even if you’ve bought a home before, it can be difficult to know which product is the best, which is where a mortgage broker comes in.

A broker, sometimes known as a mortgage adviser, will be able to recommend some of the most suitable mortgages for you and guide you through the application process.

We have more to help you decide whether it’s worth hiring a broker.

If you’re buying your first home, there are more tips in our first-time buyer guide.

How to choose a lender

Here’s a checklist:

• Research mortgage deals
• Look at different lenders and their loan options (don’t go with the first lender!)
• Factor in fees, interest rates as well as customer service to find the best mortgage lender
• Get an agreement in principle so that know what type of mortgage your lender may agree to give you
• Talk to your real estate agent for recommendations

You might want to read our step-by-step guide to buying a home.

What is a mortgage term?

A mortgage term is the total lifespan of the home loan. In other words, it is:

• The amount of time it takes to make payments until the mortgage is paid off in full
• Or if you have an interest-only mortgage, this is the amount of time it takes until you stop paying interest; at this point, you have to repay the amount you borrowed

The standard length of a mortgage term is 25 years, but you can take one as long as 40 years. Most lenders now offer this length of mortgage term to young buyers who meet their criteria.

When you sign up to a mortgage deal, you will have to choose the length of the term. The longer the mortgage term, the smaller your repayments (and vice versa).

A mortgage term assumes that you stay with the same lender on the same mortgage for the entire length of the loan. But bear in mind that the length of your mortgage term might change if:

• You overpay your mortgage, therefore shortening your term. Read our guide on overpaying your mortgage
• You take out a new mortgage (either by remortgaging or when you move home) then you can choose a shorter or longer mortgage term compared to your old deal

What does loan-to-value mean?

If you’re shopping for a mortgage you might have come across the term ‘loan-to-value’, often written out as LTV.

Loan-to-value refers to the difference between the purchase price of a property and the size of your house deposit (or equity).

It’s the ratio of what you are borrowing compared to the size of your house deposit (or equity).

For example, if you are buying a £200,000 property:

• You have a small deposit of £10,000, which is 5% of the property’s value
• Your mortgage would make up the remainder, meaning your loan to value would be 95%

If you only have a small deposit, you can expect the interest rate on your mortgage to be higher. This is because the lenders will see you as a high risk borrower.

We outline the pros and cons of 5% deposit mortgages.