Despite being a very common type of credit, mortgages can seem complicated and as there’s more than one type of mortgage, getting even a basic understanding can be difficult. Mortgages enable people to buy property, something which would be largely inaccessible without them due to the expense. As property prices – from flats to bungalows to three story town houses – typically cost in the hundreds of thousands of pounds, there are very few people that can afford to buy a house mortgage free. Even those who can afford to buy a house with cash might use a mortgage anyway to free up a bit of equity.

So, what are the most common types of mortgages? We’ll talk through the three main mortgages you’ll come across as you start your house buying journey and we’ll keep things brief so as not to inundate you with information. To fully comprehend the exact mortgage you’re applying for, it’s best to speak to the bank providing the loan – they will have plenty of information and advice to help you gain a competent understanding of just what you’re agreeing to. For now, our brief guide to mortgages might help you get started.

The Three Main Mortgages

  • Fixed-rate mortgages
  • Standard variable rate mortgages
  • Tracker mortgages

Fixed-Rate Mortgages

Most types of mortgages are named by how the interest rate is applied. A fixed-rate mortgage is a mortgage with a fixed interest rate: this means the percentage that the interest is charged at remains the same. For example, if your interest rate is 2.5%, it will stay at 2.5% throughout the term of your mortgage. Typically, with fixed-rate mortgages, you will only have a fixed interest rate for a temporary period of time, usually 2 or 5 years. Then, your mortgage will likely change over to a standard variable rate mortgage (SVR). Although a mortgage is an agreement between you and the bank, you can always change your mortgage during the mortgage term. This means you could change to a new fixed-rate mortgage once the fixed-rate period of your current mortgage ends, subject to meeting your new lender's criteria.

Standard Variable Rate Mortgages

A standard variable rate mortgage means the interest rate will change during your mortgage term. You’ll be told about SVR interest rates up front, but it is usually more expensive than the fixed-rate or tracker period at the start of your mortgage and is why you’ll often be advised to remortgage at the end of your fixed-rate term.

A variable rate mortgage means the amount you repay each month could change, so if you live on a budget to the penny, it could be financially disruptive. It’s always good to get an idea from your bank just how the repayments might change so that you’re comfortable with your financial commitments each month and can plan a rainy day fund in case your repayments increase before you’ve had time to remortgage. Even though your interest rate may only change by 0.25%, as the amount borrowed is in the hundreds of thousands, this can be a huge change to the amount you have to repay.

Tracker Mortgages

A tracker mortgage also has a changing interest rate, but it tracks the bank rate set by the Bank of England to determine the interest rate you pay on your mortgage. In some years, this could mean you pay a really small interest rate on your borrowing, in other years, this could go up significantly if the Bank of England increases its rate. At the start of the pandemic in 2020, the bank rate decreased and so people with tracker mortgages will have seen their interest rates drop too. However, as the economy starts up again and life returns to pre-pandemic normality, you could see tracker rate mortgages rise.

Which type of mortgage should I choose?

As with most decisions regarding borrowing, you should always aim to choose the lowest interest rate option, especially when borrowing lots of money. However, with mortgages you need to take into consideration the timescale. Mortgages can now be borrowed for up to 40 years, which tends to make the monthly repayments lower, but the total amount you repay much higher. As a first time buyer a 40 year mortgage might be your only option, but you should try to get a shorter mortgage term when possible, even if it means paying more on a monthly basis.

There are pros and cons to each type of mortgage. Tracker rates may sound appealing – especially as the current bank rate is only 0.1%, but often tracker mortgages have a minimum interest rate which means you might only be charged as low as 1 or 2%. Similarly, with SVR mortgages, at one point the interest rate might be really low, but it could increase at any time and you have no control over when or by how much the interest rate changes.

Fixed-rate mortgages are the easiest to budget for because you know exactly how much you’ll be charged against the amount you have borrowed. But fixed-rate mortgages tend to have lower interest rates because they are usually only offered as introductory periods to gain customers, which means your mortgage will eventually change to a variable rate mortgage. This means you have to be aware of your finances and be in control of your money – not only so you can meet increased mortgage repayments, but also so that you have the time and capabilities in place to remortgage. Remortgaging can save you thousands over the lifetime of your loan, and generally with variable rate mortgages, you won’t be charged an early termination fee so you can change lenders without penalties.

As you start to conduct your own research, you might see interest-only mortgages pop up. An interest only mortgage means you only repay the interest part of the repayments every month. It means your repayments will be much smaller, so for some people they’re a good (and possibly the only) way to get on the property ladder. However, it’s important to remember with interest-only mortgages that you aren’t building any equitable funds. This means, you won’t own any more of the house at the end of the mortgage term than you did at the start, because you haven’t actually repaid any of the capital amount borrowed from the bank. Interest-only mortgages might be a way to start you on your house-buying journey, but you should look at repayment mortgages as soon as possible. While the repayments will be higher, you’ll be increasing your financial assets.

Mortgage Calculators

There are different types of mortgage calculators to help you work out how much your mortgage repayments will be each month before you’ve even applied for an agreement in principle. While the figures won’t be an exact representation of your repayments when you have a mortgage, they can help you realise the potential financial commitments involved as a homeowner and help you to understand just what kind of budget you’re looking at. For example, you might be able to get a mortgage of £300,000 but if you can’t afford the repayments with your lifestyle, then reducing your budget to £250,000 or even £200,000 might provide you with a more comfortable day to day life. You have to remember that mortgage repayments are not the only expense associated with owning a property: you also have council tax, utility bills and in some cases, service charges. As part of your research process, you should review your current budget and reduce your dependency on credit where possible as outstanding credit might make it harder to obtain a mortgage.

While mortgages are usually necessary for buying a house, you shouldn’t stretch yourself beyond your means or commit to a miserable standard of living just so you meet your mortgage repayments each month. You need to find an equilibrium which might mean making compromises to your current budget or your ideal house. Most people don’t find their perfect home straightaway and often move to a new house (and mortgage) a few times. As you increase your equity holding in a property, your budget for a new house also increases, so you can up-size and find a house more suitable for you. However, you should aim to have repaid your mortgage by the time you retire as your pension payments are likely to be smaller than your salary. Plus, banks are unlikely to grant mortgages where the mortgage period extends past your retirement age, as they’ll be concerned about your affordability at that stage.

Mortgages aren’t the simplest form of credit, but they don’t have to be daunting either. Take your time to conduct your research and speak to different banks if you need to. There are also several helpful mortgage guides online which break down the different mortgages, their benefits and disadvantages and even suggest which types of mortgages might suit your circumstances best. Buying a house isn’t quick or easy, but it is rewarding and can provide you with financial security (as well as a home!).