Mortgage Types Explained

A mortgage is a loan from a bank or building society that goes towards the total cost of the home you want to buy. The borrower agrees to pay the lender monthly instalments over a set period.

What is a mortgage?

A mortgage is a loan from a bank or building society that goes towards the total cost of the home you want to buy. The borrower agrees to pay the lender monthly instalments over a set period.

What are the main types of mortgages?

You can choose between different types of mortgages. Some of the most common include the following:

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


Read on to learn about the pros and cons of each mortgage type.


Fixed-rate mortgages

Fixed-rate mortgages are ideal if you want to pay the same monthly amount. You can fix the rate between two and five years, and it will stay the same regardless of the lender's or the Bank of England’s rate.

Pros Cons
Your monthly payments and rate will stay the same, regardless of what happens in the market.
If interest rates drop, you may pay more than you would on a variable-rate deal.

Variable-rate mortgages

Variable-rate mortgages are determined by the lender’s standard variable rate (SVR)* and are affected by the Bank of England’s base rate. This means that if the rate falls, your rate will get lower; if the rate increases, your rate will increase.


Variable rates are usually between 1.5% and 3.5% above the Bank of England’s base rate.

Pros Cons
Your initial monthly payments will be lower, and so will the following payments if the interest rate falls.
The interest rate fluctuates, meaning your monthly payments may increase if the rate increases. It’s less stable than a fixed-rate mortgage. 

*The SVR is the interest rate your mortgage lender sets.

Discount mortgages

With discount mortgages, you’ll pay the lender the SVR with a fixed discount for two to three years.

Pros Cons
Your rate will stay below your lender’s SVR throughout the deal.
Your lender could change the SVR anytime, meaning your rate could increase.

Tracker-rate mortgages

Tracker-rate mortgages align with the Bank of England's base rate, meaning any change will affect your rate. This mortgage could suit you 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

Other types of mortgages include:

• Capped-rate mortgages
• Interest-only mortgages
• Cashback mortgages
• Offset mortgages
• Joint mortgages

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Capped-rate mortgages

With capped-rate mortgages, your payments are guaranteed to stay within the pre-agreed amount.

Offset mortgages

Offset mortgages combine your mortgage, current account and savings account. This type of mortgage uses your savings and spare cash in your existing account to reduce the interest you pay on your mortgage.

Joint mortgages

Joint mortgages involve two people applying for a mortgage together. They are both mentioned on the deeds as joint tenants or tenants in common.

Interest-only mortgages

Interest-only mortgages let you pay the interest on your loan each month instead of the entire loan. The monthly repayments will be lower than mortgage repayments because you don’t pay back any of the amount you borrowed, just the interest. This means you’ll need to pay back wat you borrowed by the end of the mortgage term or when you sell the house.

Cashback mortgages

Cashback mortgages may be up your street u if you want extra cash when moving into your new home. 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 your monthly payments.

FAQs

  • This depends on your deposit and the monthly mortgage payments. The bank usually asks for a deposit between 5% and 40%. 
  • 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.
  • The amount of interest you pay 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.
  • It’s not mandatory to use a broker, but it’s usually recommended. Brokers know the market and lenders better and can advise on the best deal for your circumstances. They can also improve your chances of being accepted for a mortgage.

    For more information on how to find the most suitable mortgage, read our comprehensive guide. Browse our collection of brand-new homes across the UK and our unique home buying offers to help you move. Start your journey today with David Wilson Homes.

Help to Sell Schemes

We have a range of schemes to help you sell your existing home.

 

Low Deposit Schemes

If you have a low deposit, we have a variety of schemes to help make moving more affordable.

 

Part Exchange

We could be your guaranteed buyer. No stress or fuss, just an easy move for you and your family.

Key Worker Scheme

We could help make your move with our Key Worker Deposit Contribution Scheme.

Own New - Rate Reducer

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

Parent Power

Parents can also help. Typically they (or a close family member) could help you with your deposit, or guarantee your mortgage, or act as a joint applicant.