Types of Mortgage

There are numerous types of mortgage. The first thing to consider when deciding which one offers you the best deal, is how you wish to repay the debt: with a 'Repayment Mortgage', or an 'Interest-Only Mortgage'. With a repayment mortgage, you pay back a small proportion of the loan amount and the interest charges each month. With an interest-only mortgage, the monthly repayments only go towards paying off the interest charges. This means that you still owe the full loan amount at the end of the mortgage term.

Since interest-only repayments do not pay off the loan itself, an investment or savings plan must be taken out alongside the mortgage, so that at the end of the term you are able to repay the full amount outstanding as one lump sum. In the 1980s and 1990s endowment mortgages were very popular. This type of interest-only mortgage relied on a stock-market based investment, an endowment policy, to grow sufficiently to pay the final lump sum. In reality, many of these investments failed to perform well, which meant that millions of UK home-owners faced the possibility of a 'shortfall'. A shortfall occurs when the investment or savings plan you set up will not cover the mortgage amount at the end of the term. For more information see Making up a Shortfall.

You will often find that mortgages are sold according to the way in which interest is calculated and charged. Most mortgage lenders have several types of 'interest-related' mortgage they can offer you, including: capped rate mortgages, discount variable rate mortgages, variable rate mortgages, tracker mortgages and fixed rate mortgages. These mortgages are standard mortgages, which are either interest-only or repayment plans. They offer you a promotional interest rate at the beginning of your mortgage, which means initially you should never have to pay the lender's standard variable rate which is usually much higher. However, if you have a poor credit rating or find that your applications are being refused, you may have to accept a less generous offer.

These promotional deals offer you a lower interest rate for a limited period, which usually lasts for between several months and several years depending on the mortgage and lender you choose. You can decide how long the agreed period will be, but you should consider your choice carefully. Generally, the shorter the period, the better the interest rate. However, shorter periods usually have an 'overhanging early repayment fee', which means that you are forced to pay the higher standard variable rate for an extended period after the promotional deal ends. In contrast, a longer period may not have the best interest rate, but will usually allow you to switch lenders without penalty when the promotional rate comes to an end. Each one of these 'interest-related' mortgages has its own advantages and disadvantages to consider before you make a final decision.

Lastly, there are hundreds of different types of specialised mortgage in the UK. Each one is aimed at meeting the needs of a different group of customers by offering specific features from which they would benefit. Depending on your circumstances, these mortgages could offer you a better deal than a conventional mortgage. Specialised Mortgages include: 100 % Mortgages, 125 % Mortgages, Buy-to-Let Mortgages, Cashback Mortgages, Commercial Mortgages, Equity Release Mortgages, Flexible / Lifestyle Mortgages, Graduate Mortgages, Green Mortgages, Guarantor & Joint Mortgages, Islamic Mortgages, Off-Set Mortgages, Poor Credit Mortgages, Self-Build Mortgages and Self-Certified Mortgages.

For detailed information about each type of mortgage see:

Choose your language

Types of Mortgage