A guide to mortgage types

Are you considering getting a mortgage but not sure which one is right for you? There are many different mortgage types on the market, so you have plenty of options. However, deciding which is the right mortgage can be daunting. Each mortgage has unique features that make it more suitable for certain circumstances than others. Our mortgage types guide will explain everything you need to know about all of your options so you can decide which is best for you.

Mortgage types explained

A mortgage is one of the biggest financial commitments you’ll likely make in your lifetime. Here we’ll outline the different mortgage types available and how they differ.

Repayment mortgages

With a repayment mortgage, the repayments you make each month covers the capital and the interest on the mortgage loan. You don’t have to worry about paying the loan back in one lump sum. If you keep up with your repayments for the full mortgage term, you’re guaranteed to clear your mortgage by the end of it. However, a long-term repayment mortgage may increase your overall costs due to the interest accrued over the mortgage term.

Interest-only mortgages

With interest-only mortgages, your monthly repayments cover just the interest on the mortgage loan, not any of the capital. You’ll have to clear the outstanding loan in full by the end of the term. There’s a wide selection of investment products you can choose from, with some offering tax advantages. If you remortgage or move house, you can usually reallocate your investment product to the new mortgage. However, the total loan amount you owe won’t reduce over time, and there’s no guarantee that your chosen investment product will increase enough to repay your mortgage loan.

Interest rate mortgage options

After choosing whether or not you want to make monthly payments on the mortgage, you need to consider your interest rate options. There are several different types of interest-rate mortgage products lenders offer. As you may expect, each option has its positives and negatives, and your choice of mortgage will depend on your current circumstances and future needs.

Fixed-rate mortgages

With fixed-rate mortgages, you’ll pay the same rate of interest for a set amount of years, so your monthly repayments will remain the same regardless of what happens with the Bank of England base rate. When you reach the end of your fixed-rate period, you’ll need to remortgage, or the lender will move you to their standard variable rate (SVR), which is typically more expensive.

Tracker mortgages

Tracker mortgages track the Bank of England base rate, plus a predetermined percentage. For instance, if the base rate is 3.5% and the mortgage comprises the base rate plus 2%, the rate will be 5.5%. If the base rate rises, your monthly mortgage repayments will also rise. Likewise, if the base rate goes down, your repayments should decrease each month, but this doesn’t always happen. Trackers also have an introductory rate deal period, after which the lender will move you to its SVR if you don’t remortgage.

Standard variable rate (SVR)

The most straightforward type of interest rate mortgage sets the interest rate based on the lender’s SVR, which is what the lender charges interest at. The lender sets this rate and if the Bank of England increases the base rate, it will increase its SVR accordingly. As the lender can set its SVR at whatever rate it wants, it can increase or decrease it, making it difficult to plan your finances. Most lenders will transfer borrowers to their SVR once the introductory rate period ends.

Discount rate mortgages

Discount rate mortgages reduce a set amount of the lender’s SVR. If the SVR changes, the rate will fluctuate accordingly, but at the same discount level — for instance, 0.5% below SVR. A larger discount typically means a shorter discount period. After this reduced rate ends, the mortgage loan usually returns to the lender’s original SVR and your payments will increase. Discount-rate mortgages tend to have higher repayment charges during the discount period.

Different mortgage features

While there are different interest-rate mortgages, some products offer additional features.

Cashback

Lenders sometimes offer cashback as an added benefit on certain mortgage types, such as tracker and fixed-rate mortgages. You’ll get a lump sum upfront if you take out one of these mortgages with cashback. The lump sum is a set amount, usually £250 to £1,000, depending on the lender and the available deal.

Offset mortgages

This mortgage type links your mortgage account to a current or savings account. You can then offset your savings balance against your outstanding mortgage loan balance and the interest is calculated on the net balance between the two accounts.

Choose Ayla Mortgages to secure your next mortgage

With so many mortgage types, choosing the right one for you can be daunting. At Ayla Mortgages, we have a wealth of experience with all types of mortgages. We will guide you through the different types and the pros and cons of each to help you decide which deal is best. We have access to more lenders and can help you secure better terms from high-street lenders. Get in touch with us today to find out more.

M & T H
M & T H
2024-06-23
We cannot recommend Jonathan enough, he is an absolute legend! We were stuck in a nightmare scenario, but he got us over the line with a smile (and lots of moral support!) Nothing was too much to ask, and now we're living in the property of our dreams. Every time the rate changed, he promptly revised the offer and we kept having a better deal each time. If you need a broker who makes the impossible possible, and the most pleasant person to deal with, Jonathan is your guy!
Claire Aitken
Claire Aitken
2024-06-19
Jonathan was absolutely excellent throughout our whole purchase experience and insurance needs. Always there for any questions and proactively reached out during what can be such a stressful time. A true professional with exceptional service skills . Thank you and can't recommend you enough. Will be back for future needs . Claire & Christopher
carline3891
carline3891
2024-06-19
I'm a first time buyer who had no idea how mortgages and buying houses worked. Plus finding me a mortgage would be a complex situation. Luckily a friend recommended Jonathan and he really did go out of his way to explain the entire process and answered all of my questions (no matter how basic they may have been). He found me a brilliant mortgage with a surprisingly low rate for my situation and this has allowed me to find and buy a home for the first time. I would definitely recommend Jonathan, especially if your eligibility may be a little complicated.
Poppy O'Flanagan
Poppy O'Flanagan
2024-05-30
Jonathan has provided us with mortgage advice on three occasions now and makes the whole process very simple. He always gives clear advice, is excellent at communicating and kept us updated throughout the process. We will definitely be using Ayla Mortgages again!
Mohamed Sayed
Mohamed Sayed
2024-03-13
High recommend! Very good broker and helpful! Just got me a flat with an amazing rate! Thank you Jonathan 🙏🏼
Jodie Marks
Jodie Marks
2024-03-06
Jonathan has been my mortgage broker for around 4yrs. His experience, knowledge and patience is second to none, Jonathan is extremely diligent and trustworthy. I have recommended him to many, and will continue to do so.
Mark Y
Mark Y
2023-12-11
I can’t recommend enough! Made the process easy, was always willing to explore every option and helped me arrive at the right product for me. Thanks again
Nick Kane
Nick Kane
2023-12-08
Jonathan is always extremely helpful and jumped onto this request asap and secured a great deal for me which I was very happy with.
Debbie Rich
Debbie Rich
2023-12-05
Jonathan is absolutely fantastic, he explains everything very clearly and always makes my remortgaging process easy, swift and affordable. He knows the market inside out. It’s a pleasure to work with him.
Eve Penford
Eve Penford
2023-09-07
Jonathan was a great help when I needed to get a UK mortgage after living for years overseas. He listened to me to determine exactly what options would be best for me, found me a great rate, and his attention to detail meant that everything went very smoothly. Would recommend!