Mortgage Types

Tracker-rate mortgages

A tracker-rate mortgage follows the Bank of England’s base rate directly. So, when the base rate goes up or down, your mortgage interest rate changes by the same amount.

This is different from a Standard Variable Rate (SVR) mortgage, where your lender sets the interest rate. SVR rates often move in line with the Bank of England’s base rate, but they don’t have to – your lender can change the rate at any time.

With a tracker mortgage, your monthly payments can go up or down depending on changes to the base rate.

Fixed-rate mortgages

A fixed-rate mortgage is a type of mortgage where your interest rate stays the same for a set period. This period is often between two and five years, though some lenders offer up to 10 years or even longer. During this time, your monthly payments won't change, no matter what happens to your lender’s rates or the Bank of England (BoE) base rate.

Pros:

• Stable monthly payments: Your payments stay the same throughout the fixed term.

• Protection from rate rises: Your interest rate won’t go up, even if the Bank of England raises its base rate.

• Easier budgeting: Knowing exactly what you’ll pay each month helps with financial planning.

Cons:

• No benefit from rate drops: If interest rates fall, you won’t pay less, like you might with a variable rate.

• Early Repayment Charges (ERCs): You may have to pay a fee if you want to repay your mortgage early or switch deals before the term ends.

Standard Variable Rate (SVR) mortgages

A Standard Variable Rate (SVR) mortgage is what you usually move to when your fixed or introductory deal ends. Your lender sets the interest rate and can change it at any time – this is often influenced by the Bank of England’s base rate. Because the rate can go up or down, your monthly payments may vary.

SVR mortgages are often more expensive than other deals, so it’s worth looking at different options when your current deal finishes.

Fixed-rate vs Standard Variable Rate (SVR) mortgages

Other mortgage types

Alongside the main mortgage types, there are a few others worth knowing about. Let’s break them down.

Offset mortgages

Offset mortgages combine your mortgage and savings account. It uses your savings in your existing account to reduce the interest you pay on your mortgage.

Example:

You have a mortgage of £150,000 and a savings account with £25,000 in it.

• You pay interest on £125,000 of your mortgage instead of the full £150,000.

• This is a 16.6% saving on the interest you pay on your mortgage.

Buy-to-let mortgages

Buy-to-let mortgages are for people buying a property to rent out, rather than live in themselves.

These mortgages are often interest-only, meaning you only pay the interest each month and repay the full loan at the end of the term.

Lenders usually see buy-to-let as higher risk, so they often ask for a larger deposit – typically between 20% and 40%.

Bank of Family

Young buyers are increasingly turning to parents, grandparents and other family members to help them purchase a home. This phenomenon is known in the UK as the ‘Bank of Family’.

Family support can take many different forms. Whether it's a cash gift towards your deposit, a loan, acting as a guarantor on your mortgage or even purchasing the property jointly, the Bank of Family offers a range of ways to help you get a foot on the property ladder. Some even choose to release equity from their own home to contribute towards their loved one’s purchase.

Later-life lending

Later-life lending refers to a range of mortgage products tailored to support older borrowers as their financial circumstances change in retirement. Two common options are lifetime mortgages and retirement interest only mortgages.

Lifetime mortgages

Lifetime mortgages are a form of equity release designed for older homeowners who want to unlock some of the value tied up in their property without having to move. Instead of making monthly repayments, the loan and interest are repaid when you sell your home, move into long-term care or pass away.

These mortgages can provide a useful income boost in retirement. But they come with important considerations:

• Eligibility: Usually available to homeowners aged 55 or over, with a property of sufficient value.

• No monthly repayments: The loan is repaid from the sale of your home later on.

• Interest builds up: Because you’re not making repayments, the amount you owe can grow quickly over time.

• Impact on inheritance: Releasing equity reduces the value of your estate, which may affect what you leave behind.

Retirement interest only (RIO) mortgages

An RIO mortgage is usually available to those aged 55 or over, though some lenders consider applicants from age 50.

With this type of mortgage, your monthly payments cover only the interest on the loan, preventing the interest from accumulating over time. RIO mortgages often offer lower interest rates than lifetime equity release products, which can make them a more affordable option for some borrowers. However, your home may be at risk of repossession if you are unable to keep up with the monthly interest payments.

Like lifetime equity releases, RIO mortgages do not have to be repaid until the borrower moves permanently into long-term care or passes away.

The role of interest rates

Higher interest rates mean higher monthly payments. Lower rates reduce monthly costs.

Example:

• At 3% interest, a £200,000 mortgage over 25 years costs £948 per month.

• At 6%, the same mortgage costs £1,289 per month.

Credit scores and mortgage types

High credit scores make it more likely that you’ll be approved for a mortgage, as you’re seen as a lower risk. They can also help you get lower interest rates.

Things you can do to improve your credit score include:

• Pay your bills on time

• Register to vote

• Open a current account and stay within any agreed overdraft

• Report mistakes in your credit report

• Don’t move home too regularly

Down payments and mortgage options

A bigger deposit often gives you access to better mortgage rates and lowers your loan-to-value (LTV). When you have a lower LTV, lenders see you as less of a risk, which can unlock more mortgage types and lower interest rates

Smaller deposits (e.g. 5%) mean a larger LTV and potentially fewer options. They also usually come with higher interest rates.

How does a lender decide if they will give you a mortgage?

Lenders use the underwriting process to assess your financial situation and decide whether to approve your mortgage application. It helps them determine how much risk is involved in lending to you.

The process can vary slightly depending on the type of mortgage. Most residential mortgages use automated systems, while complex loans may need more thorough human checks.

Here’s a simple step-by-step breakdown of the underwriting process:

1. Application review: The lender reviews your mortgage application and supporting documents. 
2. Credit check: Your credit history and score are evaluated. 
3. Income and employment verification: Lenders confirm your income, job stability, and debt-to-income ratio.
4. Property appraisal: An independent appraiser checks the home’s value to ensure it justifies the loan amount. 
5. Final decision: The underwriter decides whether to approve, deny or request more information.

Decision in principle

A decision in principle is when a lender reviews your finances and conditionally agrees to lend you a certain amount for a mortgage. It’s not a final offer, but it shows sellers you’re a serious buyer.

Benefits of pre-approval:

• Gives you a clear idea of your budget

• Strengthens your position when making an offer

• Speeds up the final mortgage process

Once you’re pre-approved, you can focus on choosing the right mortgage type. If you use a mortgage broker, they can help you compare options based on your financial situation and long-term goals.

Debt-to-income ratio considerations

Lenders use your debt-to-income (DTI) ratio to check how much of your income goes towards paying debts each month. It helps them assess whether you can afford a mortgage.

Lenders will look at debts such as student loans, car loans and credit cards. They'll also consider any ongoing financial commitments, like subscriptions or regular childcare payments.

The role of mortgage brokers

When applying for a mortgage, you might wonder whether it’s worth using a broker or going it alone. Here are some pros and cons to help you decide:

Pros:

• Expert advice: Brokers understand the market and can recommend mortgage types that suit your needs.

• Wider choice: They often have access to more lenders and deals than you’d find on your own.

• Less hassle: Brokers can handle much of the paperwork and application process, saving you time and stress.

Cons:

• Possible fees: Some brokers charge for their services, so it’s worth checking upfront.

• Not all deals are included: Some lenders only offer certain deals if you apply directly, so you could miss out on exclusive rates.

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Disclaimer:

This article is for general informational purposes only and does not constitute mortgage advice. We would always recommend that advice is taken from a regulated mortgage adviser regarding your specific circumstances.