There are two main types of mortgage on offer – these are repayment-based mortgages, and interest-only mortgages. You’ll need to choose which one is best for your financial circumstances when you decide to take out a mortgage to purchase your home.

If you require further advice on mortgages and the right type of mortgage for your circumstances, Financial Advisor UK offers a national network of fully FCA-registered and approved financial professionals who can help you find the best deals available while answering any questions you may have.

Repayment mortgages

With a repayment mortgage, you pay back the total amount you borrow from a lender over a contracted period of time. Your monthly payments also include interest and gradually bring down the total amount you owe to the lender. At the end of the mortgage term, you will have cleared all the debt to the lender and the property is yours outright. In the early years of paying back a repayment mortgage, your payments mostly work to clear the interest accrued on the overall amount. Over time, as the amount you owe reduces, your payments contribute towards paying off the outstanding mortgage amount.

Interest-only mortgages

As of April 2014, interest-only mortgages are only offered to borrowers if they have sufficient evidence that they can pay back the money owed. This makes them a much less likely option for many homeowners. With an interest-only mortgage, you only pay off the interest accrued during the mortgage term – you don’t make monthly contributions to pay back the full debt. Therefore, if your mortgage is £150,000 at the beginning of your term, you will still owe £150,000, as you have only paid off the interest. If you plan to get an interest-only mortgage, you need to set up a standing order to another account with regular monthly payments into this account so that you are actively saving up to pay off the final mortgage sum when the term finishes. This is very important, as you will need to pay the mortgage sum back in full to the lender when the term ends. The lender will want evidence that you have savings and a system in place that enables you to save up the large sum that you need to pay them back.

Once you have decided whether you’d prefer a repayment or interest-only mortgage, you need to choose the right deal for your needs and financial circumstances.

Fixed rate mortgages

A fixed rate mortgage is a mortgage with a ‘fixed’ rate that is often discounted by the lender. This means that your mortgage repayments are fixed for 2, 5, 10 or even 20 years (depending on the type of deal you sign up to). If you decide on a fixed rate mortgage, your payments will stay fixed for the term you have agreed to with the lender, and will not fluctuate, regardless of inflation or interest rates. The positives of this type of mortgage are that you know exactly what you need to pay each month, making it easier to budget. A negative of this type of deal is that if you want to leave the deal early, you’ll have to pay high charges. This is why it is important to consider how long you’d like to fix your payments for, as you won’t want to leave the fixed-rate term before it officially ends.

Variable rate mortgage

Variable rate mortgages, unlike fixed rate mortgages, have rates that can go up or down depending on the base rate of the Bank of England, interest rates and the general state of the economy. Growth and inflation will have an impact on your monthly payments. There are three types of variable rate mortgage – tracker mortgages, standard variable rate mortgages and discounted mortgages. If you sign up to any of these mortgages, you need to budget carefully to ensure that you can afford monthly payments if they go up in line with interest rates or inflation.

Tracker mortgages

This type of mortgage follows (tracks) the base rate of the Bank of England (i.e. the official borrowing rate), so your payments will be in line with this borrowing rate. Tracker mortgages are popular with homebuyers, as monthly payments can go down when interest rates fall, but you have to be prepared for rates to rise. When they do, you’ll need to pay more towards your mortgage. Another benefit is that you know that your mortgage payments can only change because of economic events, and not the lender’s own decisions.

Standard variable rate mortgages

All lenders have Standard Variable Rates (SVRs) which essentially follow the base rate of the Bank of England (typically two to five percent above it). As a result, an SVR can vary greatly between lenders. If you have a fixed-term mortgage which comes to an end, you will automatically be placed onto a lender’s SVR until you remortgage to a new deal. Always keep in mind that SVRs are highly expensive and will cause your mortgage repayments to become very high. A lender can also move its rates at any time, including hiking them if interest rates rise. Positives of an SVR include the ability to make as many overpayments as you like to chip away at the larger mortgage sum, without incurring early repayment charges. It is highly likely however that a fixed rate mortgage will be cheaper for first-time buyers and many homeowners.

Discount rate mortgages

Discounted rate mortgages typically offer a discount off of a lender’s standard variable rate (SVR). Such discounts are usually for a short period of between two and three years, but some lenders do offer the option to take out this type of mortgage for longer periods of time. If interest rates drop, so will your mortgage payments under this type of plan. Always check the small print carefully when signing up to this type of mortgage and find out where the discounts are – there can be a large difference between you receiving a percentage off of a lender’s SVR, and the rate you pay being that actual discounted percentage. Bear in mind also that a lender can raise its SVR at any time, which can affect the rate that you pay.

Top tips

• If you plan to take out a fixed rate mortgage, make sure you are going to stay in your property for that period of time. (You’ll have to pay early repayment charges if you leave the deal early).
• Early repayment charges can be up to 5% of the overall mortgage loan. Make sure you know how to avoid them.
• If you’d like to make overpayments, a fixed-rate mortgage might not be the best deal for you.
• A shorter mortgage may mean higher repayment terms, but you will pay less interest overall and own your home much sooner.
• As well as picking the type of introductory deal you’d like for your mortgage, you’ll also need to decide how long you want the term to run for. An average mortgage lasts for 25 years. Consider when you will retire and how you’ll be able to afford mortgage payments when you have given up work.
• The longer the mortgage term, the more you will have to pay.

Do you need help or advice on all-things mortgages? Are you feeling overwhelmed and wonder  where you can find the right mortgage deal? Financial Advisor UK offers a national network of fully FCA-registered and approved professionals that you can be matched with to ensure you get the best professional advice along with the best deals available on the mortgage market.