Mortgage Types Explained
Discover the differences between fixed, variable, tracker, discount, and other mortgage types— so you can choose the best fit for your budget and lifestyle.
What Is a Mortgage?
A mortgage is a secured loan from a bank, building society, or specialist lender to cover most of your home‘s purchase price. You repay it in monthly instalments plus interest over a set term—commonly 25 years, though terms can be shorter or longer.
How Mortgages Work
Once approved, you borrow the purchase price minus your deposit. That deposit—often 5%–20% of the property value—determines your loan‑to‑value (LTV) ratio. For example, a 10% deposit on a £200,000 home leaves an £180,000 mortgage (90% LTV).
Your monthly repayment covers interest plus, in most cases, some capital. At term‘s end you‘ll have cleared the entire loan balance. If you miss payments, lenders can repossess your home, so budgeting and contingency plans are essential.
Loan vs. Mortgage
A mortgage is a specific type of secured loan backed by the property as collateral. Other loans may be unsecured (no collateral) and often carry higher interest rates due to greater lender risk. Mortgages let you borrow larger sums over longer terms with lower rates—but missing repayments has serious consequences.
Main Mortgage Types
Fixed‐Rate Mortgages
Lock in a guaranteed interest rate for a set period—typically 2–5 years—so your monthly payments never change, regardless of market fluctuations.
Pros
- Predictable payments protect against rate hikes.
- Ideal for tight budgets or long‐term planning.
Cons
- May cost more if general rates fall below your fixed rate.
- Early repayment charges can be high.
Variable‐Rate Mortgages
Your rate floats relative to the lender‘s Standard Variable Rate (SVR), which moves with the Bank of England base rate. Payments can go up or down.
Pros
- Often cheaper initially than fixed deals.
- Benefit immediately from rate cuts.
Cons
- Uncertainty—payments can spike with rate rises.
- Harder to budget long‐term.
Discount Mortgages
You pay the SVR minus a fixed discount for a defined term (usually 2–3 years), giving you a below‐market rate initially.
Pros
- Lower rate than standard SVR.
- Short‐term savings potential.
Cons
- Subject to fluctuations in the lender’s SVR.
- Could rise sharply if SVR increases.
Tracker Mortgages
Your rate simply “tracks” the Bank of England base rate plus a set margin, ensuring full transparency on rate movements.
Pros
- Only affected by base rate—not lender discretion.
- Immediate benefit from cuts to base rate.
Cons
- Unpredictable payments with any base rate rise.
- No floor rate—could climb quickly.
Other Mortgage Types
Capped‐Rate Mortgages
Interest never rises above your agreed cap—even if market rates spike.
Offset Mortgages
Link your savings and current account to reduce the interest charged on your mortgage balance.
Interest‐Only Mortgages
Pay only interest each month. You must repay the full capital at term end via savings or investments.
Cashback Mortgages
Receive a lump sum or percentage of your loan upfront or after completion—helpful for covering moving costs.
Joint Mortgages
Apply with one or more people—both parties share responsibility and ownership on completion.
Mortgage Costs
Interest
Interest is the lender’s fee for borrowing money. It accrues daily on your outstanding balance and is charged monthly. A small rate change can mean hundreds extra paid over the mortgage term.
Fees
- Product fees for specific mortgage deals.
- Application fees, sometimes non‑refundable.
- Valuation fees to assess property worth.
- Higher lending charges when LTV is high.
- Broker fees if using advisory services.
- Early repayment and exit fees if you switch lender early.
If You Miss Payments
Missing repayments usually incurs late fees and damages your credit score. Lenders may offer payment holidays or term extensions, but continued arrears can lead to repossession. Always communicate early with your lender if you face difficulty.
Fixed vs Variable vs Tracker
Fixed gives certainty, variable offers flexibility and potential savings when rates fall, and tracker mirrors the Bank of England base rate exactly. Choose based on risk appetite, budgeting needs, and market outlook.
How to Get a Mortgage
- Save your deposit and check your credit score.
- Compare deals directly or via a broker.
- Obtain an Agreement in Principle (AIP).
- Gather documents: ID, payslips, bank statements.
- Complete full mortgage application.
- Arrange a valuation survey.
- Exchange contracts and pay your deposit.
- Complete purchase and move in.
Mortgage Application Process
After your AIP, you‘ll submit a full application, pay valuation and arrangement fees, then wait for formal approval. Once you receive the mortgage offer, your solicitor exchanges contracts and sets a completion date.
Will You Be Accepted?
- Property value and condition
- Your deposit size and LTV
- Credit record and income stability
- Age, term length, and any existing debts
- Joint vs sole application status
Managing Your Mortgage
Set up direct debits to avoid missed payments, keep an emergency fund of 3–6 months’ outgoings, and review your deal regularly. Remortgaging when rates fall can save thousands over the term.