Complete Guide To The Different Types
Of Mortgages

Complete Guide To The Different Types Of Mortgages

There are 7 different types of mortgages in the UK in 2021. Whether you have had a mortgage before or if you are a first-time buyer, choosing the right type of mortgage can be confusing.

Find out what each type of mortgage really means and what are the benefits in our complete guide to the different types of mortgages in the UK.

Understanding Different Types Of Mortgages

In the UK there are 7 Different Types Of Mortgages on offer:

• Fixed Rate Mortgages
• Variable Rate Mortgages
• Standard Variable Rate (Svr)
• Discount Mortgages
• Tracker Mortgages
• Capped Rate Mortgages
• Offset Mortgages

However, these can be better split into two main types of mortgages:

Fixed Rate Mortgages

In a fixed-rate mortgage, your interest rate stays the same for a set period of time. That means that no matter whether general interest rates increase or decrease, yours will not change during the pre-agreed time frame.

This time frame is agreed upon when you take out your fixed rate mortgage. You will typically find a fixed term of 2 years, 5 years, or even a 10 years in the UK. This means that your interest rate will not change for either 2 years, 5 years, or 10 years, depending on which you choose.

Benefits: The benefit of a fixed rate mortgage is that you know what your monthly payments will be for the duration of your fixed term. It will help you to budget and know exactly what you need to pay each month.

Disadvantages: The disadvantage of a fixed rate mortgage is that you often have a slightly higher interest rate than other mortgage rates. This is because you will continue to pay that same interest rate whether the other increases or not. And if interest rates fall you won’t see the benefit of it with a fixed rate mortgage.

Variable Rate Mortgages

A variable rate mortgage means that your interest rate is not fixed and could change at any time. It will increase and decrease in line with standard mortgage rates without notice. So it’s important with a variable rate mortgage to have some savings if rates do rise.

There actually are 5 subtypes of variable rate mortgages:

Standard Variable Rate (SVR)

A standard variable rate mortgage is the most common type of variable mortgage. Your interest rate will follow the standard national rate increases and decreases.

If you choose a standard variable rate, it will last the full length of your mortgage unless you change the deal you are on.

Benefits: The benefit of a standard variable rate mortgage is that you can leave at any time and are not tied into a fixed length of time.

Disadvantages: As with any variable rate mortgage, your rate isn’t fixed, which means it could be unpredictable and increase at any time.

Discount Mortgages

A discount mortgage is a type of variable mortgage that offers a discounted interest rate for a fixed period of time. Your interest rate will follow the national base rate minus a % agreed upon by your bank when you take the mortgage out.

For example, your interest rate in a discount mortgage could be SVR -2% for 2 years.

Benefits: The main benefit of a discount mortgage is that your monthly payments will be lower for the fixed term than other variable rate mortgages.

Disadvantages: The disadvantage of a discount mortgage is that your payments will still increase and decrease in line with the base rate, and will jump significantly after the fixed term.

Tracker Mortgages

A tracker mortgage is a type of variable rate mortgage that locks you into a fixed term deal that follows the increases and decreases of the standard national interest rate.

You will choose a time frame and a surplus interest % that is added to the standard interest rate. For example, you will pay the standard base rate plus or minus a certain percentage that is agreed upon when you take out your mortgage.

Benefits: The benefit of a tracker mortgage is that your payments will decrease as the standard base rate decreases. This means you will benefit from reduced payments occasionally.

Disadvantages: The disadvantage of a tracker mortgage is that your payments will increase in line with the standard base rate. So one month your payment might suddenly be a lot higher.

Capped Rate Mortgages

A capped rate mortgage is a type of variable rate mortgage that follows the base interest rate to a certain point. It is capped so that your interest rate can’t rise above a certain % no matter if the base rate goes above that point or not.

Benefits: The benefit of a capped rate mortgage is that you can still benefit from lower payments when interest rates decrease, but you also aren’t subject to massive increases as your payments are capped.

Disadvantages: The disadvantage of a capped rate mortgage is that your initial interest rate is usually higher than other variable rate mortgages because you are capping the maximum rate for the whole duration of your mortgage.

Offset Mortgages

An offset mortgage takes into consideration the amount you have in your savings and current accounts and that figure like an overpayment.

Essentially this means that you won’t be charged interest on the total amount you have in your accounts, and will only be charged interest on the remainder of your mortgage.

Benefits: The benefit of an offset mortgage is that you will find you pay off your mortgage quicker as your savings act as overpayments.

Disadvantages: The disadvantage of an offset mortgage is that you will be unable to earn any interest on savings as they are used against your mortgage instead.

Which Type Of Mortgage Is Best For Me?

The type of mortgage you choose is dependant on your circumstances. There are advantages and disadvantages to every mortgage, which will mean that some are better suited to you and others will leave you out of pocket.

So making sure you choose the right mortgage from the get-go can help to save you time, money, and stress.

If you would like support on which type of mortgage is best for you, Harmony Financial Services can help to guide you. Our specialist advisor will give you more information and talk about your circumstances so you can work out which mortgage is best for you.