Most people buying a property need to get a mortgage, which is a type of loan. Banks, building societies and specialist lenders offer mortgages, but the rates and terms differ product-to-product and lender-to-lender.

It’s important to understand the different types of mortgages available to help make an informed decision about which is best for you and your finances. When you’re unfamiliar with it, mortgage jargon can seem confusing and intimidating, so let’s find out more and make things clearer…

Types of mortgages

In a nutshell, all mortgages are loans. You borrow money from a lender to buy a property and then pay that money back in agreed instalments plus interest. The amount of interest you pay back depends on the type of mortgage you choose and the terms you agree.

So, the total amount you end up paying back is highly dependent on the type of mortgage you choose in the first place, which is why it’s so important to understand the differences between them.

Let’s start by looking at the three main types of mortgages: fixed rate mortgages, variable rate mortgages, and tracker mortgages.

Fixed rate mortgages

With a fixed rate mortgage, the amount of interest you pay will stay at a set figure for a specified length of time e.g. five years. Once this time is up, it’s unlikely that you will have repaid the mortgage, and your interest rate will probably switch to your lender’s standard variable rate (check your contract). You may be able to switch to a different mortgage product with more favourable rates (this is called a remortgage). 

Variable rate mortgages

As the name suggests, the interest rate of a variable rate mortgage will change during your contract. Your lender will set the rate, but it will usually follow Base Rate* plus a percentage.

Your lender’s standard variable rate is what you are likely to end up on once any other deals expire e.g. at the end of a fixed rate term. It can be worth looking around and seeing if there are any better mortgage deals at this point (remortgage).

*Base rate is the interest rate set by The Bank of England: the rate it charges UK banks when they borrow money.

Tracker mortgages

A tracker mortgage is a type of variable rate mortgage but the interest rate is tied to an external rate e.g. Base Rate, rather than set by the lender.

Other types of mortgages

The three mortgage types mentioned are the most common but there are other products available e.g.:

Offset mortgages

This mortgage leverages your savings to reduce your mortgage repayments. The amount you have saved is ‘deducted’ from the amount you owe on your mortgage and you only pay interest on the remainder. Your savings aren’t used to pay for your mortgage, and can still be spent/added to, but they lower the interest charged each month.

Buy-to-let mortgages

These mortgages are designed for people who want to let out a property. They are usually interest-only, i.e. your monthly repayments only cover the interest and do not pay off the loan itself. You will need to repay the mortgage at the end of the term.

Let-to-buy mortgages

If you want to buy a new home while keeping your current property and renting it out, a let-to-buy mortgage could help. Essentially, you end up with two mortgages, switching your original property to a buy-to-let mortgage and getting a residential mortgage for your new place. Income generated by letting out one property can help fund the other.

95% mortgages

95% mortgages are designed for people with relatively small deposits. The lender will provide 95% of the property value (which you must pay off in instalments) and you only have to provide a 5% deposit. This type of mortgage is most popular with first-time buyers.

Joint mortgages

This is a loan taken out in more than one name. The lender will consider your combined income and credit when determining how much to lend; all applicants will have equal claim to the property; all applicants are equally responsible for meeting monthly mortgage repayments.

Guarantor mortgages

With guarantor mortgages, a third party contractually agrees to pay the mortgage if the borrower can’t. The guarantor’s savings or property is used as collateral and the lender could seize these assets if you fail to pay your mortgage. However, the guarantor does not own a share of the property you are buying.

These types of mortgages are often chosen by people who don’t qualify in their own right for a mortgage and the guarantor is usually a parent/family member. It adds a level of security for the lender that they will get their money back.

Comparing types of mortgages

Type of Mortgage	Pros	Cons
Fixed rate mortgage	Monthly repayments stay the same Protection if interest rates rise	Losing out if interest rates fall Potentially a higher initial rate than adjustable products
Variable rate mortgage	Greater flexibility as often no penalties when paying off. Interest rates can go down	Monthly repayment amounts vary Interest rates can go up Lenders can change their rate at any time
Tracker mortgage	Potentially lower initial rates Interest rates can go down Rates are tied to a specific, external rate, i.e. not up to the lender	Monthly repayment amounts vary Interest rates can go up
Offset mortgage	Lower interest payments You may be able to pay off your mortgage faster You can still access your savings No tax to pay on your savings	Often higher interest rates You may require a large deposit You won’t gain interest on your savings
Buy-to-let mortgage	Generate income which can cover the mortgage repayment Make a long-term investment	You still pay mortgage repayments if your property is not rented out Additional Stamp Duty fee for buy-to-let property
Let-to-buy mortgage	Generate income which can cover mortgage repayments Make a long term investment	Can be a good option if you want to buy a property but are stuck in a chain You still pay mortgage repayments if your property is not rented out Additional Stamp Duty fee for a second property
95% mortgage	Buy a home with a small deposit	Often higher interest rates and fees Usually lower loan amounts It is likely to take a long time to pay off the mortgage and/or get to a point you can remortgage for a better deal
Joint mortgage	Get onto the property ladder quicker Combine money for a larger deposit/more expensive property Split costs such as Stamp Duty and legal fees	You are both responsible for repayments even if one person isn’t paying their fair/agreed share Complications arise if someone wants to move out/sell the property
Guarantor mortgage	The opportunity to buy a property when you may otherwise be refused a mortgage, e.g. due to bad credit	Often higher interest rates Guarantor could be restricted

Get in touch

If you are thinking about purchasing a property and need to think about your mortgage options, we hope our guide has provided a useful starting point. There are many different types of mortgages available, and it’s worth spending some time thinking about which one serves you best. Which will leave you better off in the long run while achieving your goals today?

The world of mortgages can feel intimidating and confusing, and it’s worth seeking the advice of an experienced professional. At Flagstone, our mortgage advisors are here to help with compassionate, expert advice. If you’re interested in tailored mortgage advice or have any questions, please don’t hesitate to get in touch.