Mortgage Types

Most home buyers will need to take out a mortgage to buy a new property. If you're on the hunt for your new home but are unsure where to start, we're here to help. Read on as we take you through the difference mortgage types and their pros and cons. 

What is a mortgage?

A mortgage is a loan from a bank or a building society towards the total cost of the property you want to buy. It makes up the rest of the payment after the deposit and is paid via monthly instalments.

How much can I borrow?

How much you can borrow depends on your deposit and the monthly mortgage payments. The bank usually asks for a deposit between 5% and 40%.


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What' is a mortgage?
How much is a mortgage?

How much do I pay each month?


Your monthly mortgage payments depend on the value and type of mortgage, the term’s length and the interest rate. The bigger your deposit, the smaller the monthly payments. 

How much interest do I pay?


The interest rate depends on your mortgage’s interest rate. The higher your deposit, the lower your interest rate and vice versa. You pay interest on top of your loan each month.  
 

What is a standard variable rate?

The standard variable rate (SVR) is the interest rate your mortgage lender sets. After your tracker, fixed or discount mortgage deal is over, you may want to switch to an SVR mortgage unless you decide to remortgage.

Should I use a broker or go the bank myself?


Using a broker isn’t mandatory, but it’s usually recommended. They know the market and lenders better and can advise on the best deal for your unique circumstance. They can also improve your chances of being accepted for a mortgage.

If you’re looking for a mortgage, L&C is the UK’s leading mortgage broker. And it’s cost-free!
What is a standard variable rate?

What are the main types of mortgages?

There are many types of mortgages to choose from. Below we dive into the main ones and their pros and cons.

  • Fixed-rate mortgages
  • Variable-rate mortgages
  • Discount mortgages
  • Tracker-rate mortgages

Fixed-rate mortgages

 
A fixed-rate mortgage is your best bet if you'd like to pay the same amount each month. The monthly payments will be the same for a set period, usually between two and five years. The rate will also be the same regardless of the lender or the Bank of England’s rate. 
 Pros Cons 
 Your monthly payments and rate will stay the same, regardless of what happens in the broader market.  If interest rates drop, you may end up paying more than you would on a variable-rate deal.

Variable-rate mortgages

 
A variable-rate mortgage is determined by the lender’s standard variable rate and is affected by the Bank of England’s base rate. So, if the rate falls, your rate will get lower; if it increases, it will also increase.

Variable rates are usually between 1.5% and 3.5% above the Bank of England’s base rate.
 
Pros Cons 
 You can cancel the mortgage at any time.  The rate is usually higher and can change at any time.

Discount mortgages

 
Discount mortgages are a type of variable-rate mortgage. You’ll pay the lender the standard variable rate with a fixed discount for a certain period, typically between two and three years.
 
 Pros Cons 
 Your rate will stay below your lender’s SVR throughout the deal.  Your lender could change the SVR at any time, meaning your rate could get higher.

Tracker-rate mortgages

 
Tracker-rate mortgages move in line with the Bank of England's base rate, meaning any change will affect your rate. This mortgage could be ideal if you can adapt your payments according to the interest rates. 
Pros  Cons 
 Your mortgage rate is only affected by the Bank of England’s base rate, not your lender’s. If it goes down, your rate will usually drop too.   You won’t know how much your monthly repayments will be throughout the deal. 

Other types of mortgages 

 
The other types of mortgages include:
 
  • Capped rate
  • Interest-only
  • Cashback mortgage
  • Offset mortgage
  • Joint mortgage
 

Capped-rate mortgage

By choosing a capped-rate mortgage, your payments are guaranteed not to rise above a pre-agreed amount. 
 

Interest-only mortgage

With interest-only mortgages, you’ll only pay the interest each month instead of the entire loan.  

 

Cashback mortgage

Cashback mortgages are ideal if you’d like extra cash when you move in. This could be anything from a one-off payment to a percentage of the overall loan. Some lenders will release the payment upfront, while others may wait until they receive the monthly payments. 
 

Offset mortgage

This combines your mortgage, current account and savings account together. It uses your savings and spare cash in your existing account to reduce the interest you pay on your mortgage.  
 

Joint mortgage

This is when two people apply for a mortgage together and are both named on the deeds as joint tenants or tenants in common.

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If you’re looking to start your next adventure, but are worried about the hassle of moving, we have a range of schemes available to help you sell your existing home.

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Own New - Rate Reducer is a brand-new scheme available on new build homes that could mean lower mortgage rates and reduced monthly payments.

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