Understanding UK Mortgage Types
The UK mortgage market offers a diverse range of products designed to meet different borrower needs, financial circumstances, and risk preferences. Understanding the terminology and characteristics of each mortgage type is essential for making informed borrowing decisions.
This comprehensive guide explains the key mortgage types available in the UK market, from straightforward fixed-rate deals to sophisticated offset arrangements, helping you navigate the complex landscape of mortgage products.
Product Selection
Choosing the right mortgage type depends on your financial circumstances, risk tolerance, and future plans. Understanding these product types helps you evaluate which features align with your needs and circumstances.
Fixed Rate Mortgages
Fixed Rate Mortgage
Mortgage with interest rate fixed for a specific period, providing payment certainty and protection against interest rate rises during the fixed period.
Example: 5-year fixed rate at 3.5% guarantees £1,264 monthly payment on £250,000 mortgage regardless of Bank of England base rate changes.
Initial Rate Period
Promotional period during which the fixed rate applies, typically ranging from 2 to 10 years, after which mortgage reverts to lender's standard variable rate.
Example: 2-year fixed rate at 2.8% for initial period, then reverts to SVR of 5.5% unless remortgaged to new deal.
Early Repayment Charge (ERC)
Penalty for paying off or switching mortgage during fixed period, typically 1-5% of outstanding balance, designed to compensate lender for lost interest.
Example: 3% ERC in year one means £7,500 penalty on £250,000 mortgage if switched early, reducing affordability of remortgaging.
2-Year Fixed
Short-term certainty with flexibility to remortgage soon. Ideal for those expecting rate falls or income changes.
Typical Rate: 2.5-4.5%
5-Year Fixed
Medium-term security balancing rate certainty with reasonable flexibility. Most popular choice for stability.
Typical Rate: 3.0-5.0%
10-Year Fixed
Long-term security with highest payment certainty but limited flexibility and typically higher rates.
Typical Rate: 3.5-5.5%
Whole of Term Fixed
Complete rate certainty for entire mortgage term but highest rates and no flexibility for changes.
Typical Rate: 4.0-6.0%
Variable Rate Mortgages
Standard Variable Rate (SVR)
Lender's default variable rate used as fallback when promotional deals end, typically highest rate offered and can change at lender's discretion.
Example: Nationwide SVR of 5.74% applies after fixed deals end, significantly higher than promotional rates but offers payment flexibility.
Discounted Variable Rate
Variable rate set as fixed discount below lender's SVR for promotional period, moves up and down with SVR changes but maintains discount.
Example: 1.5% discount off SVR means if SVR is 5.5%, you pay 4.0%, but rate moves with any SVR changes during discount period.
Tracker Mortgage
Variable rate that tracks Bank of England base rate plus fixed margin, transparent pricing that moves automatically with base rate changes.
Example: Base rate plus 2% means if base rate is 1.5%, you pay 3.5%, rising automatically to 4.5% if base rate increases to 2.5%.
Capped Rate
Variable rate with maximum limit (cap) protecting against rate rises above specified level, providing upside protection while allowing downside benefit.
Example: Variable rate capped at 5% means you benefit from rate falls but payment never exceeds cap level regardless of rate environment.
Variable Rate Features
- Payment Flexibility: Usually allow overpayments and early repayment without penalties
- Rate Risk: Payments can increase if interest rates rise significantly
- Rate Transparency: Tracker rates offer clear relationship to base rate movements
- Market Timing: Benefit from falling rates but exposed to rising rate environment
Offset & Flexible Mortgages
Offset Mortgage
Mortgage linked to savings account where savings balance reduces mortgage interest calculation, providing tax-efficient way to use savings without losing access.
Example: £200,000 mortgage with £50,000 savings means interest charged on £150,000, saving £1,750 annually at 3.5% rate.
Current Account Mortgage
All-in-one account combining mortgage, current account, and savings, with credit balance reducing mortgage interest and overdraft facility available.
Example: Virgin Money One Account allows salary credits to reduce mortgage balance daily, minimizing interest while maintaining spending flexibility.
Flexible Mortgage
Mortgage allowing overpayments, underpayments, and payment holidays based on previous overpayments, providing cash flow flexibility for borrowers.
Example: After £10,000 overpayments, borrower can take equivalent payment holiday or reduce monthly payments temporarily without penalty.
Daily Interest Calculation
Interest calculated daily on outstanding balance rather than annually, ensuring immediate benefit from any payments or credits to linked accounts.
Example: £5,000 payment on 15th reduces interest from that day, saving £75 over remainder of year compared to annual calculation.
| Feature | Standard Mortgage | Offset Mortgage | Current Account Mortgage |
|---|---|---|---|
| Savings Benefit | None | Interest reduction | Daily interest reduction |
| Overpayment Facility | Limited (£500-£1,000/month) | Unlimited | Unlimited |
| Access to Overpayments | None | Via savings withdrawal | Immediate via overdraft |
| Tax Efficiency | Standard | No savings tax | No savings tax |
Specialist Mortgage Types
Interest-Only Mortgage
Mortgage where monthly payments cover interest only, with capital balance remaining unchanged, requiring separate repayment vehicle for capital at term end.
Example: £300,000 interest-only at 4% requires £1,000 monthly payments plus separate £300,000 investment plan for capital repayment.
Part-and-Part Mortgage
Hybrid arrangement with portion on repayment basis and portion interest-only, balancing lower payments with partial capital repayment security.
Example: £300,000 split 50/50 means £150,000 repayment (£894/month) plus £150,000 interest-only (£500/month) = £1,394 total.
Self-Build Mortgage
Specialist product for property construction with funds released in stages as building progresses, typically interest-only during construction phase.
Example: £400,000 self-build with 25% initial release, then staged payments for foundations, roof, first fix, completion stages.
Guarantor Mortgage
Family member guarantees mortgage payments using their property as security, helping borrowers with limited income or deposit access better rates.
Example: Parent's £300,000 property secures child's £180,000 mortgage, enabling 100% purchase despite limited income evidence.
Shared Ownership Mortgage
Mortgage for part-ownership scheme where borrower buys percentage share (25-75%) and pays rent on remaining portion to housing association.
Example: 50% share of £300,000 property requires £150,000 mortgage plus £300/month rent on remaining 50% share to housing association.
Specialist Products
Specialist mortgages often have higher rates, stricter criteria, or additional risks. Ensure you understand all terms and have appropriate exit strategies, particularly for interest-only arrangements.
Rate Structure Terminology
Tiered Rate
Different interest rates applied to different balance bands, typically offering better rates for larger mortgages to reflect lower lender risk.
Example: 3.5% on first £150,000, then 3.2% on balance above £150,000, providing effective blended rate for larger borrowings.
Stepped Rate
Interest rate that changes at predetermined intervals during initial period, often starting low then increasing to encourage early remortgaging.
Example: Year 1 at 1.99%, Year 2 at 2.99%, Year 3 at 3.99%, then SVR, designed to attract borrowers with low initial rate.
Cashback Mortgage
Mortgage providing lump sum payment at completion, typically 1-10% of loan amount, often with higher rates or longer tie-in periods to compensate.
Example: 5% cashback on £200,000 provides £10,000 at completion but rate may be 0.5% higher than standard equivalent product.
Fee-Free Mortgage
Product with no arrangement fee but typically higher interest rate, beneficial for smaller loans where fees represent high percentage of borrowing.
Example: Fee-free at 3.8% versus £999 fee at 3.5% makes fee-free better for loans under £100,000 over typical 2-year period.
Rate Comparison Factors
- Annual Percentage Rate (APR): True cost including fees spread over loan term
- Total Cost of Credit: All payments including interest and fees over comparison period
- Break-Even Analysis: Point where higher rate equals fee savings for your circumstances
- Exit Costs: Early repayment charges and redemption fees affecting switching flexibility
Product Features & Options
Portability
Ability to transfer mortgage to new property when moving house, maintaining existing rate and terms without early repayment charges.
Example: Portable 5-year fixed rate allows house move in year 3 without losing remaining 2 years of fixed rate or paying ERCs.
Additional Borrowing
Option to borrow extra funds on same mortgage terms for home improvements or other purposes, avoiding need for separate loans at higher rates.
Example: Additional £30,000 borrowing at 3.5% mortgage rate rather than 8% personal loan rate saves £1,350 annually in interest.
Payment Holiday
Temporary suspension of mortgage payments during financial difficulty, typically requiring prior overpayments or lender agreement with interest continuing to accrue.
Example: 3-month payment holiday adds £3,750 to balance (£250,000 × 3.5% ÷ 4) plus extends term or increases future payments.
Rate Switch Option
Facility to change to different rate type with same lender without full remortgage process, useful for adapting to changing circumstances or market conditions.
Example: Switch from 5-year fixed to tracker if expecting rate falls, or to different fixed period for changing circumstances.
Feature Value
Additional features may command rate premiums but provide valuable flexibility. Assess whether features align with your likely needs and circumstances over the mortgage term rather than paying for unused options.