Types of Mortgages Available in the UK Explained

When choosing a mortgage, you will have several options to consider and it’s important to understand that there is no single ‘type’ of mortgage that will suit everyone.

The options that are available and suitable for you will usually depend on your income, deposit, the property you are buying and how you want to repay your mortgage. Your plans can matter too, particularly how long you expect to stay in the property and whether you prefer the certainty of a fixed rate or are comfortable with a variable rate that can change over time.

In this article, we walk you through the main types of mortgage that are available in the UK, how repayment methods and interest rates work, and what you need to consider when searching for your mortgage. Let’s begin.

What Are the Main Types of Mortgages in the UK?

While it’s easy to get lost in the list of different types of mortgages, it can first be helpful to understand that most mortgages in the UK will fall into two main repayment methods:

• Repayment mortgage: your monthly payments cover the interest and repay some of the capital. By the end of your mortgage term, the total loan will be fully repaid providing all payments are made as agreed.
• Interest-only mortgage: your monthly payments will only cover the interest of the mortgage loan, leaving the original loan needing to be repaid separately at the end of the mortgage term.

Every mortgage option works differently and will have its own benefits and potential drawbacks, and so it’s worth starting your search by asking the question: which repayment plan best suits your property plans?

Repayment Mortgages

A repayment mortgage is the most common and straightforward way to repay a mortgage. Each monthly payment will cover both the interest charged by your lender and part of the amount you originally borrowed, known as the capital.

For example, if your monthly mortgage payment is £1,000, it could be split as follows:

• £700 towards the interest charged that month
• £300 towards reducing the mortgage balance
• £1,000 total monthly repayment

It’s important to note that the split between interest and capital will change over the mortgage term. As the total balance you owe reduces, more of your monthly payment will usually go towards repaying the capital and less towards interest. Provided you make all monthly payments as agreed, your mortgage should be fully repaid by the end of the term.

The total cost of your monthly repayments will depend on a variety of factors, including how much you borrow, your interest rate and the length of your mortgage term.

Interest-Only Mortgages

An interest-only mortgage allows you to pay only the interest charged on your mortgage each month, without repaying the capital you originally borrowed.

When comparing an interest only mortgage vs repayment mortgage, the monthly payments will generally be lower on an interest-only mortgage because you are not reducing the total capital owed. Instead, you will still owe the original mortgage loan at the end of the term.

For example, if you borrowed £200,000 on an interest-only mortgage at an interest rate of 4.5%, your payments would be approximately:

• £750 interest payment each month
• £0 towards reducing the £200,000 capital
• £200,000 will still need to be repaid at the end of the mortgage term

You will therefore need a credible repayment strategy to repay the outstanding balance when the mortgage ends. Depending on the lender, this could include investments, savings or the planned sale of another property.

Interest-only mortgages are commonly used for buy-to-let properties. However, each lender will have their own eligibility criteria and requirements for acceptable repayment strategies.

What Are the Different Types of Mortgage Products?

Your mortgage product will determine how your interest rate works and whether or not that rate is subject to change over time. Crucially, this is separate from your repayment method, which determines how you pay back the money you borrowed.

For example, you could choose a repayment mortgage and then select either:

• A fixed-rate product: You repay the capital and interest each month, while your interest rate stays the same for an agreed fixed-period.
• A variable-rate product: You still repay the capital and interest each month, but your interest rate can rise or fall depending on the type of product and changes to the rate it follows.

The key difference between these products is how much certainty you want to have over your interest rate and monthly repayments.

Fixed-Rate Mortgages

A fixed-rate mortgage does exactly what it says on the tin: your interest rate is fixed for an agreed period. This keeps your monthly repayments predictable, regardless of wider economic changes such as movements in the Bank of England base rate.

Once your fixed period ends, you will be moved onto your lender’s standard variable rate (SVR) unless you arrange another deal. Each lender sets their own SVR and can change it at their discretion.

A lender’s SVR will typically be higher than the introductory fixed or tracker rate offered on their mortgage products, which can result in higher monthly repayments. However, to avoid moving onto the SVR, you can usually arrange a new deal through a product transfer or remortgage before your fixed rate ends.

Let’s look at how a fixed-rate product works in practice. For example, a £200,000 repayment mortgage over 25 years with a five-year fixed rate of 4.5% could work as follows:

Please note that the figures included are an illustrative example based on a £200,000 repayment mortgage over 25 years. Actual SVRs will vary by lender and are subject to change.

The main benefit of a fixed-rate mortgage is certainty. During your fixed period, your interest rate and monthly repayments will remain the same, making it much easier to manage and budget for without worrying about interest-rate increases.

There are several types of fixed rate mortgages available based on how long your rate is fixed for, with two and five-year deals among the most common. Shorter and longer deals are also available and what will work best for you will depend on your current finances and plans for the future.

Variable-Rate Mortgages

A variable-rate mortgage has an interest rate that can rise or fall in response to changes in the Bank of England base rate or a rate set by your lender. Exactly how your rate changes will depend on the type of variable mortgage product you have.

There are three main types of mortgage rates that fall under the variable-rate umbrella:

• Tracker mortgages: Your interest rate tracks another rate, typically the Bank of England base rate, plus a set percentage. For example, a tracker set at the base rate + 1 percentage point would charge 5% if the base rate were 4%.
• Discount mortgages: You receive a discount from your lender’s standard variable rate (SVR) for an agreed period. For example, if the SVR is 7.5% and your discount is 2%, your mortgage rate would be 5.5%. However, your rate can still change if the lender changes their SVR.
• Standard variable rate (SVR): The lender sets this rate and can change it at their discretion. Borrowers will usually move onto their lender’s SVR when an introductory mortgage deal ends unless another deal is arranged.

Unlike a fixed-rate mortgage, with a variable-rate mortgage there is no guarantee that your interest rate will remain the same for an agreed period. Should your interest rate fall, then your monthly repayments could become cheaper.

However, if interest rates rise, then you will need to be able to budget for higher repayments.

The important difference is what determines your rate. A tracker follows an external rate, while discount mortgages and SVRs are linked to rates set by the lender.

To see what this could mean for your monthly repayments, let’s look at a £200,000 repayment mortgage over 25 years at three different interest rates:

Please note that figures are illustrative. Actual repayments will depend on your mortgage balance, remaining term and the interest rate that applies.

Variable-rate mortgages can offer several potential benefits. If interest rates fall, your monthly repayments could become cheaper, while some products may also provide more flexibility than fixed-rate deals. Depending on the mortgage, you may have lower or no early repayment charges (ERCs), making it easier to switch deals, repay your mortgage early or make larger overpayments without facing a penalty.

However, the trade-off is uncertainty. Your interest rate and monthly repayments could just as easily increase, so it is important to consider whether your budget could comfortably afford higher mortgage costs.

How Do Mortgage Interest Rates Work?

Mortgage interest is calculated against the outstanding balance of your mortgage. With a repayment mortgage, your monthly payment can be broken down into two parts:

• Interest is calculated: Your lender calculates the interest due based on your outstanding mortgage balance
• Capital is repaid: The remaining part of your monthly payment reduces the amount you owe

As your outstanding balance gradually falls, the interest charged will generally reduce too. This means more of your monthly payment can go towards repaying the capital over time.

The interest rate available to you will depend on several factors, including:

• Your loan-to-value (LTV) ratio
• The mortgage product and length of deal you choose
• Your credit profile
• The property and purpose of the mortgage
• Wider market conditions and lender pricing

Your mortgage interest rate will have a direct impact on how much your mortgage costs. However, the lowest interest rate will not always mean the lowest overall cost. Mortgage fees, incentives and the length of the initial deal can all affect how much you pay, so these should be considered alongside the interest rate when comparing deals.

What Mortgage Options Are Available for First-Time Buyers?

Being a first-time buyer does not limit you to a specific type of mortgage, and you can still choose from a wide range of standard mortgages, including both fixed and variable-rate products.

The mortgages available for first time buyers will largely depend on your deposit, income and the lender’s affordability assessment. As a first-time buyer, you may also be earlier in your career or naturally have had less time to build a large deposit. These factors can affect how much you can borrow and the mortgage deals available to you.

This is where mortgage deals that are specifically designed for smaller deposits, family-assisted products and government-backed schemes can provide additional routes to buying your first home.

Depending on your finances and lender criteria, your options could include:

• Standard mortgages: First-time buyers can access the same standard mortgage products as other homebuyers, subject to lender eligibility and affordability checks.
• 95% LTV mortgages: With a 5% deposit, you may be able to borrow up to 95% of the property’s value, including through lenders participating in the permanent Mortgage Guarantee scheme.
• Zero-deposit mortgages: Some lenders offer mortgages that allow eligible first-time buyers to borrow 100% of the property’s value without the need for a deposit.
• Shared Ownership: Eligible buyers can purchase a share of a property through the Shared Ownership scheme, reducing the deposit and mortgage required.
• Offset mortgages: An offset mortgage differs from a standard repayment mortgage by linking your savings to your mortgage balance, reducing the amount you pay interest on while keeping your savings accessible.
• First Homes: This government-backed scheme allows eligible first-time buyers in England to purchase qualifying homes at a 30%–50% discount to market value, subject to local availability. You can check the requirements and availability through the First Homes scheme.

Most importantly, there is no single mortgage option that will suit every first-time buyer. Your deposit, income and the lender’s affordability assessment will ultimately determine what type of mortgage you can afford and which products are available to you.

Speaking to a whole-of-market mortgage broker can help you compare options across different lenders and receive personalised advice based on your finances, property plans and longer-term goals.

What Type of Mortgage Do I Need for a Rental Property?

With a buy-to-let mortgage, lenders will usually assess how much rent the property could generate when deciding how much you can borrow. This is one of the main differences compared with a standard residential mortgage.

Most lenders do this using an interest coverage ratio (ICR), which checks whether the expected rental income will cover the mortgage interest by a required amount. In practice, this means the rent you expect to charge and accumulate can directly affect how much a lender is prepared to offer you. Your deposit, personal income, landlord experience and the property itself will also influence your options.

Buy-to-let mortgages are commonly arranged on an interest-only basis, although repayment mortgages are also available. Interest-only can keep your monthly mortgage payments lower, but you will still owe the original amount borrowed at the end of the term. A repayment mortgage costs more each month but gradually reduces the balance you owe.

The right choice will depend on your finances, expected rental income and longer-term plans for the property. There are also several mortgage options for buy-to-let to consider depending on how you plan to own and manage your investment.

What Other Specialist Mortgage Options Are Available?

Not every mortgage application fits neatly within a lender’s standard criteria. You might have an irregular income, previous credit problems or want to buy a unique property that falls outside the criteria of some lenders.

This doesn’t necessarily mean you can’t get a mortgage. While your options may be more limited, specialist lenders can often consider circumstances that mainstream lenders may not accept.

Some common situations where specialist mortgage options could help include:

• Self-employed: Specialist lenders can offer more flexible criteria for self-employed applicants, particularly when assessing your accounts, trading history and how your self-employed income is calculated.
• Complex income: If your earnings come from multiple or less conventional sources, such as bonuses, commission, overtime or investments, specialist lenders can take a more flexible approach to how your overall income is assessed.
• Bad or adverse credit: If you have missed payments, defaults or CCJs, some specialist lenders can take a more flexible approach to your credit history than standard lender criteria allow
• Later-life borrowing: If you need a mortgage that extends into retirement, specialist lenders can consider your age, retirement income and ability to afford the mortgage over the proposed term
• Non-standard properties: If you are buying an unusual property or one with a non-standard construction type, specialist lenders may accept properties that fall outside the criteria of mainstream lenders

Whether a specialist mortgage is right for you will depend on your individual circumstances. While it can open up options that may otherwise be unavailable, interest rates, fees and lending terms can differ from standard mortgages, so it’s important to compare the overall deal before deciding.

How Do I Compare Different Mortgage Products?

With many mortgage deals available across the market, it’s important to compare the overall deal rather than focusing too heavily on any single feature. Interest rates, fees, incentives and deal terms can all affect how suitable a mortgage is and how much it could ultimately cost you.

For example, a mortgage with a slightly higher interest rate could work out cheaper overall if it has lower fees, while another deal could offer useful incentives such as cashback or a free valuation.

When comparing your options, consider:

The right comparison will also depend on your plans. For example, a longer fixed-rate deal could provide greater certainty, but an early repayment charge could matter if you expect to move home before the fixed period ends.

For many homeowners, this is where working with a whole-of-market mortgage broker can be particularly useful. A broker can compare mortgage deals from across the market on your behalf, taking into account the interest rate, fees, lender criteria and your longer-term plans.

Rather than simply looking for the lowest advertised rate, a broker can help you compare the overall cost and identify which mortgage deals are most suitable for your circumstances.

What Type of Mortgage Is Right for Me?

When deciding what type of mortgage is best for your circumstances, there are several decisions to make rather than simply picking one type of product.

You need to consider how you want to repay what you borrow, how you want your interest rate to work and which lenders and products you are eligible for. From there, you can then narrow down the options that best suit your finances and future plans.

Naturally, your financial circumstances will also affect what type of mortgage you can get, including:

• Your income and employment status
• The size of your deposit and loan-to-value (LTV)
• Your credit history
• The property you want to buy
• How long you expect to keep the mortgage or stay in the property
• Your ability to afford higher repayments if interest rates change

Ultimately, choosing the right type of mortgage means finding a combination that works for your finances now while also considering what you may need from your mortgage in the future.

Working with a whole-of-market mortgage broker can help you explore your options across different lenders and narrow down the mortgage products that align with your finances, circumstances and longer-term goals.

How Can a Mortgage Broker Help Me Compare Products?

Finding a mortgage yourself can mean comparing hundreds of products, each with different interest rates, fees and eligibility requirements. Even if a mortgage deal looks good at first, you could uncover additional fees or find that you don’t meet the lender’s eligibility criteria. Without checking these details early, you could spend valuable time pursuing a mortgage that ultimately isn’t suitable for you.

A mortgage broker can take this work off your hands. They will assess your circumstances, establish how much you could borrow and research the mortgage deals available to you before making a recommendation.

This can include:

• Comparing interest rates, fees and incentives across different lenders
• Checking lender criteria before recommending a product
• Calculating the overall cost of different mortgage deals
• Explaining the benefits and drawbacks of different repayment and rate options
• Recommending a mortgage based on your circumstances and plans
• Preparing and submitting your mortgage application

At Boon Brokers, our mortgage advisers can compare products from a panel of more than 90 lenders, including high-street and specialist lenders. We can assess your borrowing potential, explore the deals you are eligible for and recommend a suitable mortgage based on your circumstances and plans.

Our mortgage advice is completely free. You will have your own dedicated adviser who can explain your options, arrange your mortgage application and support you throughout the process.