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Which type of mortgage is right for me?

Updated 03 September 2020

8min read

Nick Green
Financial Journalist

What type of mortgage do you need? This is actually a two-part question:

  1. What kind of property are you hoping to buy?
  2. What kind of mortgage deal will work best for you?

Most people take out a mortgage to buy a home, so we’ll tackle question 2 first. Read on to find out how to get the best value mortgage deal as a homebuyer.

Why do I need a good mortgage deal?

When you take out a mortgage, you want to know first and foremost if you can afford the monthly repayments. The answer depends on how much you borrow, and also on what mortgage deal you have.

Here you can find out more about the different types of mortgage deal such as fixed rate, tracker, capped, discounted and variable.

  1. What is a mortgage deal?
  2. How do I get a good mortgage deal?
  3. How strong is my mortgage application?
  4. Comparing different types of mortgage deal
  1. Mortgage fees
  2. Finding the best all-round deal
  3. Other types of mortgages

What is a mortgage deal?

A mortgage deal is the agreement you have with your lender, covering the initial rate of interest you will pay, and how long you’ll pay this rate for. Usually a deal will not last for the whole period of your mortgage – most deals last between two and five years, though a few do run for longer. Once your deal expires, you will still have your mortgage, but your repayments will now be calculated by the lender's Standard Variable Rate (SVR) of interest. 

How do I get a good mortgage deal?

Getting the right mortgage deal for you depends on both your attitude to risk and your circumstances, including your credit score. If you are in a strong financial position with a large deposit, or are prepared to pay a higher arrangement fee, then you should be offered a better range of deals to choose from. However, if you have only a small deposit, and cannot (or don’t want to) pay a big arrangement fee, then your choice will be more limited.

Use our Mortgage Calculator to find out how much you could borrow, how much it might cost a month and what your loan to value ratio would be.

How strong is my mortgage application?

The stronger your mortgage application, the more likely you are to be offered a mortgage - and the better your mortgage deal is likely to be. To qualify for a lender's very best deals, you will need a very robust application with a sizeable deposit. You can get a quick estimate of how likely your application is to succeed by using our Mortgage Checklist tool. This is a simple and free way to check how ready you are, and because it doesn't run a credit check on you, it won't affect your credit file.

Comparing different types of mortgage deal

The risk when taking out any mortgage is that interest rates may rise in the future, increasing your monthly repayments – perhaps until you can no longer afford them. This is why many buyers try to limit their risk through their particular mortgage deal. Timing is also very important – for example, there are times when a tracker mortgage is a better choice than a fixed-rate, and vice versa.

Here are the main types of deal available, and their pros and cons.

Fixed rate

Risk: low

Suitable for: First-time buyers, more cautious people

With a fixed-rate mortgage, you know exactly how much interest you will pay for the length of the deal period. The only downside is that if mortgage rates fall, you will be stuck paying the same rate of interest. Once a fixed-rate deal ends, the interest you pay will switch to the lender’s SVR, which is typically higher and also far less predictable. At this point, you may decide to try and remortgage to get a new deal.

Find out more about fixed-rate mortgages.

Tracker

Risk: Medium

Suitable for: People willing to take more risk and pay more if necessary, in exchange for the chance that they may end up paying less.

A tracker mortgage moves in line with an external interest rate (usually the Bank of England base rate), and may be set slightly higher or lower. The main advantage is that it falls when the tracked rate falls, but on the downside there is no limit to how high it can go. Tracker mortgages are most popular when base rates are high but falling, or likely to fall in the near future (because no-one wants to fix their mortgage at a high rate).

Discounted

Risk: Medium-high

Suitable for: Those looking for the lowest rates, but who could afford to pay more and can cope with unpredictability

Discount mortgages may offer some of the lowest rates available, so can be very attractive initially. However, the discounted period is limited, and the mortgage tracks the lender’s SVR rather than the base rate. This can mean rate rises are higher and far less predictable.

Variable

Risk: High

Suitable for: Those who could afford to pay a lot more if necessary, or those unable to obtain any other kind of deal

Variable mortgages follow the lender’s SVR, which may rise even if the Bank of England’s base rate does not. Initially interest rates may be affordable, but be aware that these can rise significantly and without warning.

Offset

Risk: Medium

Suitable for: Those with variable income but substantial savings

Popular among self-employed people and those whose income fluctuates, an offset mortgage is a special kind of deal that lets you use your savings as a kind of ‘counterbalance’ to your mortgage. You keep your savings in a special account run by your mortgage provider, and the amount is subtracted from the amount of your mortgage on which you have to pay interest. So if you have a loan of £150,000 and there are £20,000 in savings, you’ll only pay interest on £130,000.

Offset mortgages may also be a way for parents to help their children obtain a mortgage.

What about mortgage fees?

When taking out a mortgage you will have to pay fees – ranging from quite small to very substantial, depending on the deal being offered. Types of fees may include:

  • Arrangement fee – this is the biggest variable. Some mortgages have no arrangement fee, while others run to a few thousand pounds. Some buyers add this fee to the mortgage if they can’t spare the cash up front – but if you do this, you’ll pay more over time due to interest.
  • Booking fee – when you agree a deal, you often have to pay a fee upfront to secure it. Expect this to be between £100 and £200.
  • Valuation fees – this is a standard check your lender will carry out on the property to make sure it’s worth the price you are paying for it. The cost of this is about £300. Note that although this valuation is a type of survey, it is no substitute for hiring your own surveyor.

If you are buying your next home, you may have the option of keeping your current mortgage, and so may be able to avoid these set-up fees.

Finding the best all-round mortgage deal

As you can see, there are lots of factors to balance out when looking for the best mortgage deal. An independent mortgage adviser can explain all your options to you, help you weigh up the pros and cons, tell you how much you’ll be paying now and if interest rates rise, and enable you to make a truly confident choice. Most importantly, they can search the whole of the market to find the best deal for you, and maximise your chances of your application being accepted.

Read more about different types of mortgages and the other costs of moving.

Other types of mortgage

If you’re not just buying a home for yourself but need a mortgage for some other reason (e.g. buying to let, or buying business property) then you’ll want to find out about some of the other types of mortgage available. We cover those below – along with the various types of residential mortgage too.

  • Residential mortgages
    • Repayment mortgages
    • Interest-only mortgages
    • Combined mortgages
  • Commercial mortgages
  • Buy-to-let mortgages

Most mortgages are used to buy homes, but other kinds enable you to buy property to let, or business premises such as offices or shops. The other big difference is how you repay your loan. This quick introduction will help you find the right kind for you.

I’m buying a home

A mortgage used to buy a home is a residential mortgage. These are available in three types: repayment, interest-only and combined rates.

  • Repayment mortgage – Your monthly payments will pay back the whole loan, including interest, over the mortgage term (usually 25 years, but can be much longer). This means that when the mortgage term is over, the borrowed money is completely repaid.
  • Interest-only – Your monthly payments will pay only the interest on the loan (so will be smaller than with a repayment mortgage). However, at the end of the mortgage term you will have to pay back the original amount you borrowed. You might do this by using other savings or investments, or by selling the property.
  • Combined rates – Your mortgage may be a mixture of repayment and interest-only, so that a portion of the loan is paid off by the end of the mortgage term.

I want to build my own home

Rather than buy an existing home, you may be able to buy a plot of land, secure planning permission and manage the building of your own home. This can work out more affordable for some people, and is a way to get your home exactly as you want it – though of course it is a major project.

For this you can take out a self-build mortgage. This loan covers the cost of the plot of land and the amount you need to build the property, including the materials and labour. It’s different from a normal residential mortgage in that you receive the money in instalments rather than one sum, so that the lender can make sure you’re spending it on the building project and not on anything else.

Find out more about building your own home.

I’m buying to let

If you want to buy a property to rent out to tenants, you’ll need a buy-to-let mortgage. This type of mortgage is more risky for a lender, so your mortgage deal will probably require you to pay a higher interest rate. This type of mortgage generally requires a larger deposit as well.

Most buy-to-let mortgages are interest-only, though repayment mortgages are also available for this. If you're buying a property to rent out to more than three tenants who aren't part of the same household (i.e. paying rent individually), then you'll need a special House in Multiple Occuptation (HMO) mortgage.

I’m buying business premises

If you want to buy business premises, such as a shop, you’ll need a commercial mortgage. Again, this kind of mortgage carries higher risk for a lender, so this can affect both the deal you are offered and the amount you are able to borrow. Generally you can’t borrow as much as you can with a residential mortgage.

Commercial mortgages are available as both interest-only and repayment. Talk to your mortgage adviser and/or your accountant about which kind will be best for your business.

How much can I borrow?

For any kind of mortgage, the amount you can borrow is based on a number of variables. These include your income, your other expenditure, the source of your income (e.g. how reliable is it?), how much money you can put down as deposit, the value of the property itself, and other factors.

How much interest will I have to pay?

The amount of interest you’ll have to pay on the money you borrow will depend on your mortgage deal (see above).

Why should I use a mortgage adviser?

The advantage of an independent mortgage adviser is that they can give you unbiased advice that covers the whole of the mortgage market. They work for you, putting your interests first, so unlike a provider they will not try to push you into any particular deal. They can also give you invaluable advice on which type of mortgage is right for your situation and how much you can realistically afford. Most importantly, they can help you make the strongest possible mortgage application, maximising your chances of getting the deal you want.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.