What Are The Different Types Of Mortgage?
2nd June 2017
There are a number of different types of mortgage to suit the many types of property. Mortgages fall into three categories: repayment, interest only, or a mix of the two, but these categories can be broken down into more types of mortgage.
When you’re looking for a mortgage, you’ll see there’s options available to suit your circumstances - whether you’re self-employed or buying an investment property, for example. It’s a good idea to know how each type of mortgage works and which might be best for you before going ahead.
Whilst you’ll want to compare rates, there are other factors to take into account, such as what you’ll be using the property for, how much you have saved towards a deposit, and the amount you can afford to pay back each month.
Before you get started, we’ve outlined below what the different mortgage types are, along with whether or not you can find them through Trussle.
The majority of mortgages in the UK are repayment mortgages. With a repayment mortgage, you’ll pay back a portion of the money you borrowed to buy the property, plus interest. You’ll have paid back the entire amount borrowed and you’ll own your home outright by the end of your mortgage term. There are lots of types of repayment mortgages - fixed, tracker, variable, and discounted variable all come under the repayment mortgage umbrella.
With an interest-only mortgage, you don’t pay back the money you borrowed to buy the property until the end of the mortgage term. Instead, you only pay back the interest each month, making your monthly payments much lower than with a repayment mortgage.
Lenders will only lend for an interest-only mortgage if they’re confident you’ll be able to pay the amount back at the end of the mortgage term. Before taking out an interest-only mortgage, lenders will want to know how you intend on paying back the loan - often people do this by saving regularly throughout the mortgage term, cashing in on stocks and shares, or through pensions and investment bonds.
If, by the end of the mortgage term, you can’t pay back the loan amount, you might have to sell the property to pay for it.
Fixed, tracker and variable rate mortgages
Repayment mortgages are either fixed, tracker, or variable rate mortgages. When you’re deciding which is right for you, the decision comes down to whether you want the stability of knowing how much you’ll be repaying each month, or whether you want the flexibility and can afford to take the risk (and a potentially lower rate) with a tracker mortgage. Two million homeowners in the UK are on their lender’s Standard Variable Rate (SVR) and paying more than necessary.
Capped rate mortgages
Some variable rate mortgages, most commonly the SVR (which generally tends to be more expensive) can be capped at a certain point, so you’re never paying more than a set limit. However, this limit tends to be fairly high.
Flexible mortgages are often recommended when it’s likely you’ll be able to overpay some months, but not others. Instead of having a higher fixed rate that at times could be too high for your budget, flexible mortgages give you the option of overpaying when you have more to spend, and paying less when you don’t.
Often fixed and tracker rate mortgages will charge you if you want to make overpayments, but flexible mortgages make this a fee-free option. Flexible mortgages are suited to people with a salary likely to increase at times over the year - if you receive regular bonuses, for example.
First-time buyer mortgages
Buying your first home is one of the most exciting purchases you’ll ever make. As a first-time buyer, you can apply for the majority of mortgage types. It’s generally harder to be accepted for a buy-to-let mortgage, but some lenders do offer first-time buyer buy-to-let mortgages.
The government’s Help to Buy scheme is also available to first-time buyers, although you’ll need to meet certain eligibility criteria to qualify.
Note: We’re working towards supporting government schemes including Help to Buy, but are unable to provide this service just yet. For now, we’re focusing on one thing at a time in our effort to deliver the best possible mortgage experience for everyone. Follow us on Facebook, LinkedIn, or Twitter to be the first to know when we support this service.
If you’re buying a property with the sole intention of renting it out, you’ll need a buy-to-let mortgage. Many landlords who are investing in property to generate an income choose interest-only mortgages to keep monthly payments low and maximise their returns.
However, buy-to-let mortgages have higher interest rates than residential mortgages.
You’ll usually need a deposit of around 25% to get a buy-to-let mortgage. The amount you could borrow for a buy-to-let mortgage is based primarily around the rental income you’ll receive and lenders often aren’t as focused around your personal income. Bear in mind that the lender’s feesinvolved with getting a buy-to-let mortgage are often higher than residential mortgage fees.
A commercial mortgage applies to any property you buy that you won’t be living in. You can get a commercial mortgage as an individual - often, people take out commercial mortgages when they can’t take a further business loan.
Buy-to-let is in fact a type of commercial mortgage, but the rules differ from other types of commercial mortgage. If you’re buying a property that’s classed as commercial, such as an office building, shop, warehouse, or apartment complex, you’ll need a commercial mortgage to go with it.
Commercial mortgages differ from residential mortgages in that some lenders have a minimum borrowing amount of £75,000 or more due to the legal and administrative costs of taking financial responsibility for a commercial property. These same costs make it uneconomical to borrow less than £50,000.
Mortgages for bad credit
If you’ve had bad credit in the past, there’s a good chance you’ll still be able to get a mortgage. Certain lenders specialise in mortgages suitable for people who have a history of bad credit. The rates are usually more expensive as the borrower is seen as higher risk. Read more about the best ways to maximise your chances of getting a mortgage with bad credit.
There’s no such thing as a ‘remortgage mortgage’ - instead, remortgaging is the process of switching your mortgage to take advantage of a more competitive rate, especially if you’re paying your lender’s Standard Variable Rate (SVR). Over 3 million UK homeowners currently have a SVR mortgage, paying more per year than they’d be if they switched to a market leading rate.
What kinds of mortgage can I get through Trussle?
Fixed, tracker and variable rates
Capped rate mortgages
First-time buyer mortgages (although we can’t currently help if you’re using a Help to Buy, or any other government scheme)
Commercial mortgages We don’t help with commercial mortgages directly, but you can still apply for one through us. Our partner will then manage your application.
Remortgaging We can tell you if you’re eligible to switch to a more suitable deal, and if you are, we’ll find you the most competitive deal. If not, we’ll keep an eye on your mortgage with our mortgage monitor and let you know when it’s time to switch.