Explaining All The Different Types Of Mortgages

*This is a collaborative post

Buying a house, in general, can be quite confusing, and the different types of mortgages can be mind-boggling. I’ve been through the mortgage application process twice now, but there were still some things I wasn’t aware of when I was researching for this post. Unless you’re super clued up I’d also suggest going to a mortgage broker who will be able to make suggestions based on your exact situation. You can use an online mortgage calculator before going to a broker to get an idea of how much you may be able to borrow. It’s so useful to do this so you know you’re looking at homes around the right value. And to know if you’re able to borrow as much as you want.

The different types of mortgages aren’t just about the lenders and rates, but there are different types. Do you know what a tracker mortgage is? A buy-to-let mortgage? Or a home move mortgage? A first-time buyer mortgage? There are so many different choices available. But don’t panic. You may be able to eliminate some from your choices straight away depending on your situation. A mortgage is one of the biggest financial commitments you’re likely to make in your lifestyle. So you’ll want to choose the best thing for you.

Here are some of the different types of mortgages on offer:

Fixed-Rate Mortgage

I thought I’d start with the fixed-rate mortgage as it’s the type of mortgage that we have on our house. This can be seen as an attractive deal for many people as it guarantees your interest-rate, and therefore your monthly payment will stay the same for a set amount of time. You can fix your rate for one, three, five, or even ten years. So if the interest is low when you apply you may want to lock it in for even longer. From memory, we went for either a three or five years fixed mortgage when we applied for ours.

Once the period is over you’ll be switched back to the standard variable rate. So this would be a good time to look at the different types of mortgages and see if you want to change.

Different types of mortgages: Tracker mortgage

Next up is the tracker mortgage. With this type of mortgage, it doesn’t stick to one rate of interest, but it follows the Bank of England base rate so you’ll pay a slightly different amount per month. Some months you may pay less if the base rate drops, and other months you may pay more.  If the current interest rate is high you may not want to lock yourself into a fixed mortgage with it and instead gamble on a tracker.

With this type of mortgage, you’ll want to see how the base rate has changed over the past year or so. And see if there are any predictions for the future. This way you’re not going in blind and have an idea on roughly what you could expect.

Standard Variable Rate

This type of mortgage is the lender’s standard rate, and it’s what you’ll be put on once a fixed-rate mortgage ends. This mortgage type will be called different things depending on the lender, but it’s their standard rate. It’s worth looking at the standard rate your lender offers as each one will be different. You may find it’s cheaper to stay on your lender’s standard variable rate after your fixed term ends while you’re waiting for the next good fixed-rate deal.

Lenders can set their own rates and change them whenever and however they like so beware of this.

Different types of mortgages when it comes to interest

Once you’ve chosen how you’ll pay for your mortgage; i.e. via a tracker, standard, or fixed-rate mortgage. You can choose which part of your loan you want to pay off monthly.

Interest-Only Mortgage

This one is pretty much what it says on the tin. You won’t be paying off any of the mortgage itself, only the interest it earns. So your monthly payments will be lower than other kinds of mortgage deals but remember you aren’t actually paying off any of the borrowed loans. At the end of the term, you will have to pay the loan in full.

This type of mortgage is usually favoured by people who want to invest the money they’d spend on paying the mortgage to try and make money. Then pay off the full amount when it comes to the end of the term. But unless you’re sure you’ll be able to pay it off this can be a risky move. As if you can’t pay it you’re likely to have to sell your house.

Repayment Mortgage

This is one of the most common types of mortgages whereby you’ll gradually pay back what you’ve borrowed alongside any interest throughout your deal. With this type of mortgage, your balance will get smaller every month as long as you keep up with your repayments. And your mortgage will be paid off once your term ends (as long as you don’t re-mortgage). The majority of renovation mortgages are repayment mortgages.

It’s worth remembering that when you first start paying off your mortgage, you’ll mainly be paying off interest. But this will go down over time.

Do you have a mortgage? What type did you go for?

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