When buying a house, you will have to take out a mortgage loan from a bank or building society of your choice such as Lloyds, Barclays, Nationwide, NatWest Bank and more. It is overwhelming to wade through all the jargon and information so this is a short guide on the different types of mortgages that you could take on.

You will have to pay back your mortgage loan plus interest to the bank or building society by the end of your term which you decide on, this could be 2 years, 5 years or more.

Fixed Rate

  • This is the most common type of mortgage for people to take on.
  • You pay the same rate for a set number of years making monthly payments.
  • You can decide how long your term is, 2 or 5 years is the most common however, you can choose a longer term of 7 or 10 years if you wish.
  • This type of mortgage means that the amount you pay each month remains consistent regardless of the Bank of England base rate.
  • At the end of your term, you will have to remortgage or be moved over to the lender’s standard variable rate (SVR) which is usually more expensive.
  • You cannot exit your term without having to pay an early repayment charge.

Tracker Mortgage

  • The lender tracks the Bank of England base rate and changes along with it. They also add a set percentage.
  • The current base rate is 5.25%, so if your bank’s set rate is 1% you will have to pay 6.25% interest on your loan.
  • Some of these types of mortgages will come with a limit so your rate can only fall to a certain level. This means even if the Bank of England base rate falls lower, your rate will not drop that low.
  • There will not be as much consistency with this type and the amount you pay back each month could regularly change.

Discount Mortgage

  • Your lender could change their SVR meaning your rate could change as well.
  • Your rate will not depend on the base rate of the Bank of England but on the lender's SVR. This means that even if the base rate of the Bank of England goes down, yours will not be affected, however, if it goes up yours will not automatically go up as well.
  • These types of mortgages can often have the lowest rates however your lender could change this at any time.

Interest only Mortgage

  • During the set term, you will only have to pay back the interest not the actual amount you borrowed.
  • When your term is up that is when you will have to pay back the amount you borrowed in a lump sum.
  • You will have to have a secure way to make sure you will be able to pay back the whole amount by the end of the term.
  • This type of mortgage is not as common as the lender will require proof that you have a plan to pay them back in full.

Factors to consider when deciding which one is best for you

  • Will your income regularly change?
  • Could you manage if your monthly payments suddenly went up?
  • Do you like to have consistency and know what is coming ahead of time?
  • Will you be able to pay the whole amount each month for the whole term?

A new mortgage model will soon become available in the UK called the Dutch-Style Mortgage which could make it more affordable for people to take out mortgage loans.

Taking out a mortgage loan is the biggest financial commitment you can make so it is important to have all the information and to shop around for the best deal for what you need. You can use sites to compare different deals making it simple such as Compare the Market.

You can use a mortgage calculator to determine how much you can afford to borrow without accumulating debt and getting yourself into a bad situation. This will take into account your salary and how much you have for your deposit. It is important to take into account other factors such as your existing debt, you’re spending and how much the deposit will be, so don’t get caught out.