A comprehensive guide to mortgage types

1. Repayment mortgage

This is the most common type of mortgage. With each payment you make, you chip away at the loan and the interest. Providing you maintain your payments on time, every time, your outstanding balance will be completely paid off by the end of your mortgage term (usually between 25-30 years).

2. Interest-only mortgage

On an interest-only mortgage, your monthly repayments tend to be lower, as you only pay the interest on the loan; the loan itself only becomes payable when you reach the end of the mortgage term.

Making lower monthly payments may seem an attractive prospect, but you also need to consider the risk involved. It’s best to discuss this with a qualified mortgage adviser. You’ll also need to plan how you will raise funds to clear the loan at the end of the agreement.

3. Fixed-rate mortgage

With a fixed-rate mortgage, your monthly repayments will most likely stay the same throughout your fixed term (typically two to five years). However, there are occasions when it can change, for example, if late fees have been added due to missed payments.

Any rise in interest rates won’t impact the amount you pay each month. But by the same token, if interest rates fall, you won’t feel the benefit as your repayments will still stay the same.

4. Tracker mortgage

A tracker mortgage is a type of variable mortgage. Some (but not all) variable-rate mortgages follow the lender’s Standard Variable Rate (SVR) or Standard Mortgage Rate (SMR). Legally, lenders don’t have to amend their interest rate if the Bank of England base rate changes.

However, if they do follow the base rate and it happens to drop, then your interest rate will also drop, and so will your mortgage payments. In this situation, you have the option to maintain your payments and clear your mortgage earlier.

If the base rate increases, however, it will make your mortgage payments more expensive. Sometimes no changes are made to the base rate, which means your interest rate and payments will stay the same.

Bear in mind, your mortgage provider will charge interest on top of the base rate, as per your mortgage agreement.

5. Remortgaging

When your initial mortgage finishes, you will move onto the lender’s default interest rate, the SVR. Usually, the SVR isn’t very competitive, and it can be increased or decreased by the lender at any time. This makes budgeting more difficult.

Once your current mortgage deal ends, you’re free to make overpayments or move to a new deal without facing early repayment charges.

You could consider remortgaging, which means moving to a new mortgage provider, or requesting a new mortgage product with your current lender.

At Ocean, we can help you to find a suitable deal before your current one finishes, and you can usually reserve it for three months. This means we can sort everything out for you and set up the new mortgage ready for when your current deal comes to an end. As with all mortgages, approval depends on your individual circumstances and the lender’s criteria.

6. Discount mortgage

A discount mortgage is another type of variable mortgage. You pay a fixed percentage less than the lender’s SVR for a certain period of time. Some deals can be ‘stepped’, meaning the interest rate increases partway through the offer period.

You’ll always pay an agreed percentage less than the SVR whilst your deal is in place, but the lender can change the SVR. In turn, your payments could go up or down with these changes, so budgeting is important.

Also, be aware that the largest discounts don’t always equate to the cheapest deals. For example, one bank may offer to deduct a higher percentage of interest than another, but if their SVR is higher to start with, the interest rate may remain higher overall.

7. Capped rate mortgage

A capped rate mortgage is also variable, so the interest you pay can go up and down in line with the lender’s SVR - but there’s a ‘cap’ on the interest rate, so it can’t exceed a certain limit. The cap will be set by your lender.

The interest rate tends to be higher than a tracker mortgage, because of the peace of mind capped rate mortgages can offer.

8. Bad credit mortgage

Some lenders specialise in mortgages for those with bad credit. So if you have a less-than-perfect credit history, it may still be possible to get a mortgage. Bear in mind that higher interest rates may apply. Each lender uses their own criteria and there’s no guarantee of acceptance.

A number of factors are taken into consideration, such as your credit score, your income, the size of your deposit and the amount you want to borrow, for example.

9. 100% mortgage

With a 100% mortgage, you borrow the total value of the property without putting down a deposit.

Although this might sound appealing, there is a high level of risk involved. For instance, you could fall into negative equity if you owe more than the property is worth (if house prices were to fall for instance). For this reason, there aren’t many 100% mortgages on the market. The only types of 100% mortgages available are guarantor mortgages.

10. Guarantor mortgage

With a guarantor mortgage, someone you trust (like a family member or friend) promises to pay your mortgage if you can’t afford to. These types of mortgages help people with bad credit, or no credit, to get on the property ladder. But again, there’s no guarantee of approval.

Your guarantor usually has to have a good credit history, and they normally have to use their savings or property as a form of security. This reduces the risk from the lender’s point of view.

You still have to be aware of the risks that both you and the guarantor take by entering into an agreement of this kind. Negative equity is still a possibility, and if you and your guarantor don’t maintain your repayments, your home could be put at risk of repossession. Not only that, your guarantor’s own home and financial security could also be put at risk.

11. Cashback mortgage

Some mortgage providers offer you a lump sum of cash as an incentive to take out a mortgage with them. This could help to pay towards your solicitor fees or moving costs for example. But you need to weigh up whether you’ll be saving money overall when you take fees and interest rates into account.

12. Flexible mortgage

There are different types of flexible mortgages. Some allow you to make underpayments or take payment holidays if you’re struggling financially. Others let you make overpayments without facing early prepayment charges, meaning you could pay off your mortgage quicker. Others may allow you to make lump-sum withdrawals.

Be mindful that these features often result in higher interest rates, so make sure that you‘ll definitely use them before you opt for a flexible mortgage.

It’s also worth bearing in mind that many other types of mortgages will let you overpay a certain percentage of your mortgage each year.

13. Offset mortgage

An offset mortgage is a type of flexible mortgage. Your savings are used to reduce the amount of interest you pay on your mortgage in total. This means your monthly payments stay the same, but you should end up paying off your mortgage sooner.

The way it works is, you link your mortgage with a savings or current account (taken out with the same lender). Then you only pay interest on the difference.

So for example, if you have a mortgage of £200,000 with £20,000 of savings, your lender will only charge you interest on the difference, which is £180,000, instead of the full amount.

14. Buy-to-let mortgage

Buy-to-let mortgages are commercial mortgages, designed for landlords who want to buy a property solely to let it out. This type of mortgage is not suitable for those who want to live in the property themselves.

You can take out a buy-to-let mortgage on an interest-only or repayment basis (although most chose interest-only). The interest and fees are normally higher than on most regular mortgages, and you’ll usually need a deposit worth around 20-40% of the property’s value.

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Mortgages are secured against your property. This means your home may be at risk if you fall behind with your mortgage repayments.

Note, the more you borrow and the longer your mortgage term, the more interest you'll pay in total.

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