Different types of mortgages

There are a variety of mortgages and mortgage interest rate options to choose from, including:

Flexible mortgages

With a flexible mortgage you have the option to change or vary your monthly payments to suit your circumstances or to pay off the loan earlier. Some flexible features are becoming common on other types of mortgage too, such as overpayments, under payments, payment holidays and extra borrowing. Many flexible mortgages are free of early redemption penalties, so you're not locked in and can move to another, more suitable, product if you so desire.

Offset mortgages

With an offset mortgage, your main current account and/or savings accounts are linked to your mortgage. Each month, the amount you hold in these accounts is deducted from the mortgage balance before the interest is calculated on the loan.

As the balance of your current account and savings accounts rises, you pay less interest on your mortgage, but if the balance of these accounts decreases then you'll pay more.

Cashback mortgage

With a cashback mortgage, the lender pays you a sum usually equivalent to 2-5% of the loan amount shortly after the mortgage (or remortgage) completes. Normally the cashback is offered as part of another benefit e.g. an interest rate discount, but pure cashback products are available.

Normally, lenders apply an early redemption charge to this type of mortgage, so if you do move to another lender within the first few years of the loan you may need to pay a significant sum back to the lender in order to exit the agreement.

Standard variable rate mortgage

Your payments will fluctuate in line with changes to your lender’s standard variable rate; this is often, but not always, driven by the Bank of England’s base rate. Essentially this means that your monthly payment could go up as well as down.

Typically, standard variable rate mortgages can be a more expensive way to borrow money compared with other mortgages, although usually there will be no redemption penalties in place giving you the flexibility of moving to another lender or product when it suits you best.

Tracker rate mortgages

A tracker mortgage is a variable rate loan that is usually set at a percentage above or below the Bank of England or another independent base rate. Your interest rate will track (move up or down) in line with that rate.

With a tracker rate it's more difficult to budget as your payments can fluctuate, so you should ensure that you can stretch to a higher monthly payment amount should you need to - however if interest rates do go down you will benefit. This type of mortgage may include an early redemption charge and an overhang.

Fixed interest rate mortgage

With a fixed rate mortgage the interest rate applied to your loan is fixed for a set period, meaning that the amount you pay is guaranteed to stay the same for the duration of the fixed rate – even if interest rates do go up. If interest rates go down, you won't benefit. The main advantage of a fixed rate mortgage is that it makes it easier for you to budget your monthly outgoings and you can be confident that your monthly payments won’t rise to an unaffordable level.

Once the fixed rate period ends, however, your lender will normally switch you to their standard variable rate and this means that your payments could fluctuate. Fixed interest rate mortgages almost always include early redemption charges and some may also have an overhang i.e. where the early redemption charge remains in place for a set period after the fixed rate has ended.

Capped interest rate mortgage

With a capped interest rate mortgage your monthly payments are variable and may be linked to a base rate, but they are also capped at a certain level (known as the ceiling), above which they cannot rise. The cap will apply for a set period, after which you will normally move to the lender’s standard variable rate.

The main advantage of this type of mortgage is that you have the security of knowing what your maximum payment will be over a set period, but can also benefit if interest rates go down. Typically, capped interest rate mortgages include an early redemption charge and some may also have an overhang.

Discounted interest rate mortgages

With a discounted interest rate mortgage your payments will be variable but you will get a discount on the lender's standard variable rate for a set period of time. When this comes to an end, you’ll usually move to your lender’s standard variable interest rate.

Discounted mortgages almost always include an early redemption charge and may include an overhang. You should always be confident that you can afford the repayments once the discounted period ends.

In the final part of our guide we take a look at insurance and highlight other things you should be aware of when looking for the right mortgage deal.

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