What are the different types of mortgages?​

Interest rates change over time, and that could be good or bad for your mortgage repayments. Depending on how the market rates vary year on year, a non-fixed mortgage can see your monthly repayments drift up and down. This can make your basic budgeting tricky. A fixed-rate mortgage gets around this problem by setting your interest rate in stone, at least for an agreed period. No matter what happens to interest rates in that time, you'll always know what you'll have to pay each month. Once the set period runs out, you can fix your rate again or not.

Fixed-rate mortgages can be a great option for first-timers without a lot of flexibility in their budgets. You'll always have a clear picture of your repayments, so planning out your financial future gets a lot easier. If mortgage interest rates go up, you'll be protected for as long as your fixed-rate period lasts—and you'll at least have a heads-up in advance of what'll happen when that period expires.

The obvious flip-side of that coin is that you won't feel the benefit of a drop in interest rates, since you'll still be paying at the higher level you agreed to. While that's a genuine worry to weigh up, it's worth remembering that interest rates have been creeping upward in recent years—to a 13-year high as of June 2022.

Okay, so a fixed-rate mortgage doesn't have all the answers. What are the alternatives? Another popular option is the tracker mortgage. Instead of a pre-set rate of interest on your repayments, your rate will be tagging along with the Bank of England's so-called base rate. This is absolutely the most important interest rate in the UK, and it affects a huge range of other interest rates you might find yourself dealing with throughout your life.

The length of time your interest rate will follow movements in the Bank of England's base rate depends on the type of tracker you've picked. A lifetime tracker, for instance, follows along with the Bank of England for the full length of the mortgage. Meanwhile, a term-tracker mortgage might only track for up to 2- 3 years.

So, what are the up-sides and down-sides to a tracker mortgage? Honestly, you've probably guessed them already. If the base rate goes down, so does the interest on your mortgage repayments. If it goes up, though, you'll be paying more each month. As we mentioned above, the last few years have seen a gradual but steady creep upward in the base rate. In June 2022, for instance, it hit 1.25%, which is the highest it's reached sine the big banking crisis of 2008. On the other hand, the COVID-19 pandemic saw the base rate plummet to 0.1%. If can be a bit of a roller coaster if there's a lot of disruption in the economy, but in the right circumstances a tracker mortgage can still pay off well over the longer term.

A discount mortgage is one where your lender uses their own "standard variable rate" (SVR) as the starting point for your mortgage repayments, but they bring it down by a set percentage so you don't end up paying the full whack. Standard variable rates are generally set by lenders themselves. That means they can charge more or less whatever they want—although they've obviously got to try to stay competitive enough to attract borrowers in the first place.

As the lender's SVR changes, the rate of interest you're paying will wobble up and down with it, but you'll still get your discount applied—at least for as long as the discount lasts. Once that period expires, you'll generally be shifted onto the SVR as normal. Some mortgage types reduce your discount percentage in stages over time, so the saving you're making will go down along with it. Depending on the deal you're on, there might also be set limits as to how high or low your interest rate can go.

With an offset mortgage, you're basically tying your savings and mortgage together. Sounds confusing, right? It's actually not that complicated when you get into it. Essentially, the amount of cash in your linked savings account brings down the percentage of your mortgage that you're actually paying interest on. So, for instance, if you've got a mortgage for £200,000 but you've got £50,000 in your linked savings account, you'll only be charged interest on £150,000 of your mortgage amount.

This kind of deal can obviously be great if you've got a lot of savings to lean on—especially if your month-to-month income's a little harder to predict reliably. Self-employed people, for instance, can often have irregular earnings. Bringing down the amount you have to repay each month with an offset mortgage can be a strong move, as long as you've got the savings to make it worthwhile.

Fancy trying your hand at the landlord game? That's exactly what buy-to-let mortgages are designed for. This probably won't be a good option for first-time buyers, though, with minimum deposits often ranging from 20%-40% and relatively high interest rates to deal with. You'll also need a decent credit score to land one of these deals, along with a pretty steady income.

So, all that aside, how is this different from a normal mortgage? Well, for starters, your potential lender's going to be keeping one eye fixed on the kind of rent you're likely to be able to get from your property. Ideally, they'll expect that to more than cover the mortgage repayments themselves. Depending on your expectations and goals, you could go for either an interest-only mortgage deal or one that gradually pays off the capital. Interest-only mortgages obviously have lower monthly repayments to cough up, and they're pretty popular with landlords for that reason. They'll still leave you owing a large amount of money on the property, though, since you'll have to pay back the full loan amount in a lump at the end of the mortgage term. Also, throughout the whole lifetime of the mortgage, the amount you're being charged interest on won't go down, meaning it'll end up costing you more than a repayment mortgage on the same property would.

With a joint mortgage, you can share the load of your monthly repayments with one or more other people. You'll all be collectively responsible for keeping up the repayments, and will obviously share ownership of the property itself. Joint mortgages, naturally enough, are popular with couples, but there are plenty of other groups of people willing to team up to buy a property.

As for the advantages, one of the biggest is that you'll have a much wider range of properties to choose from. By combining the incomes of everyone in your group when you apply for your joint mortgage, you'll have a lot more cash to play with when you're house-hunting. There's some bad news along with the good, of course. For one thing, it's not just your combined earnings that your lender's going to consider when deciding if you're a safe bet for a mortgage. If one of you has an iffy credit history, for instance, that can easily count against you. Also, things can get complicated fast if you aren't splitting the deposit and repayments equally—particularly if, somewhere down the line, some of you end up wanting to sell the property while others don't.

So, what happens if you can't quite seal the deal on a mortgage on your own? Maybe you don't quite have a strong enough credit history, or enough money coming in to convince a lender you can cover the deposit and monthly repayments. In that situation, a guarantor mortgage can pry open doors that you'd otherwise find slammed in your face. Basically, what you're doing is calling in some back-up in the form of another person with a more solid financial history than your own. They guarantee the repayments for you, meaning they take on responsibility for them if you run into money trouble and can't keep them up. Obviously, you can't just pick anyone to be your guarantor. They'll need to be a homeowner themselves, for example—plus they'll need to be able to show that they can afford to make any repayments you'd otherwise miss.

We talked a little bit about mortgage rate caps earlier, when we covered discount mortgage deals. With a capped rate, your interest will still drift up and down according to your lender's SVR. However, you'll always know that there's an absolute ceiling on how high it can go. As with other mortgage options, there are positives and negatives to this. On the up-side, assuming your upper interest limit is set somewhere fairly comfortable, you shouldn't have any real worries about being able to afford your repayments. On the down-side, though, your mortgage could also have a "collar" rate—meaning a minimum level your interest will never drop below. You're pretty much trading away the potential benefits of interest rates dropping in order to kill off the risk of them soaring.

There really is no single, simple answer to the question of which mortgage is best for you. It's all about weighing up your whole financial situation and balancing the risks and rewards of the various available options. The key to making that decision, as always, is understanding how what those options have to offer. Keep checking back here for more money tips and updates. We’re experts at saving you cash and we’re always here to help. That’s the reason why you’re better off with RIFT.