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The Different Types Of Mortgages


There are two major decisions you will need to make when selecting a mortgage plan: Will you have an interest-only or repayment mortgage, and will you have a fixed or adjustable rate mortgage.

In this guide we'll outline the advantages and disadvantages of each plan. You then should be able to make the right decision, based on your current situation.

The best thing you can do at this point is to read about all of the mortgage plans out there, and become aware the opportunities that are available. Once you are aware of what is out there, shop for different plans via mortgage comparison websites (we've listed our favourites below), and when you are ready to move forward, contact a mortgage advisor for a free consultation (also provided below!).

Interest-only vs. Repayment Mortgages

The majority of homeowners acquire a repayment mortgage. A repayment mortgage plan pays back the interest as well as the initial capital you borrowed for the purchase every month.

An interest-only plan pays back just the interest each month, and then pays the capital lump sum at the maturity date of the loan.

Most borrowers should avoid interest-only mortgages. This is because generally homeowners do not have enough savings to pay off the lump sum at the end. But if you are confident with your savings account, then you should speak with a mortgage advisor because this option could be in your best interest (no pun intended!).

Interest-only Mortgages


  • Cheaper monthly payments
  • More control over how you invest to make up for the lump sum due at maturity date; however, banks will need to see solid evidence of how you plan on reinvesting this money.
  • Debt will depreciate over time due to inflation.
  • A pound today is worth more than a pound tomorrow.


  • Your investment will need to perform well (higher risk than repayment); if you are not able to raise the capital you borrowed initially then you are in quite a bind and at risk of repossession of your property.
  • Not as much of an increase in home equity - i.e you'll own less of your home. Therefore refinancing can be more expensive, as better interest rates will be available to you if you have more equity in your home.

Repayment Mortgages


  • Peace of mind / security – knowing that you will own your home outright at the end of your mortgage is very reassuring
  • Majority of UK residents choose a repayment mortgage
  • Easier mortgage plans to get, compared to interest-only mortgages
  • More equity in your home


  • Higher monthly payments
  • Less cash on hand

Fixed vs. Adjustable Rate Mortgages

Fixed rate mortgages are pretty self-explanatory as the interest you pay does indeed stay at the same rate for the duration of the loan. Fixed plans in the UK are typically only 2 – 5 years, then one is switched over to an adjustable rate mortgage plan after that fixed plan matures.

The interest rate of Adjustable Rate Mortgages (ARM) fluctuates, and in general, they trend along with the interest rate determined by the Bank of England.

Interest rates have been historically low for a few years due to the banking crisis (and now Brexit). This greatly rewarded those with adjustable rate mortgages because their interest rate synchronizes with the Bank of England base rate.

If you are purchasing your first mortgage plan, it would be in your best interest to speak with a mortgage consultant about the fixed rate mortgage plans that are available to you.

Interest rates are not likely to go down much further from 0.5%, therefore, you can expect the adjustable rate mortgage plans to only increase their monthly payments in the near future. However, you should still shop around all types of mortgage plans as they are competing for your business.

With that being said, here are the advantages and disadvantages of each plan.

Fixed Rate Mortgages


  • Peace of mind about monthly payments
  • No variability
  • If interest rates rise you are unaffected and your payments do not increase


  • Fixed rate mortgages are more difficult to get for a borrower with not great credit
  • If interest rates decrease then you see no benefit or decrease in monthly payments

Adjustable Rate Mortgages


  • Monthly payments decrease when interest rates do
  • Easier mortgages to get for those with not great credit


  • More variability in monthly payments due to the fluctuation of interest rates
  • Monthly payments increase when interest rates do

Types of Adjustable Rate Mortgages

Tracker Rate:

  • This rate includes the Bank of England base rate as well as a set percentage added on to that
  • Most tracker mortgages allow for an overpayment of your mortgage penalty free
  • You do see benefit from a decrease in interest rates, but also a downside from an increase in interest rates

Standard Variable Rate:

  • Lenders have their own Standard Variable Rate (SVR), which are riskier plans because the lender has complete control over the interest rate they charge you. However, it does tend to synchronize with the Bank of England base rate, and according to Which? the average SVR in June 2016 was 4.81% which further reassures this option.

Discount Rate:

  • A discount rate mortgage offers a discounted interest rate and is often an introductory plan, lasting around 2 – 5 years, for a lenders SVR plan.
  • Most will allow you to make overpayments with no penalty fee
  • Discount mortgages interest generally tracks along with the Bank of England base rate
  • Some discount rate plans include an interest rate floor

Capped Rate:

  • Have an interest rate ceiling that the lender cannot charge above
  • Typically serves as an introductory plan, lasting anywhere from 2 – 5 years
  • Not the cheapest mortgage plan, because you are paying extra for the security you feel with an interest rate ceiling
  • Rarest of all types of mortgages

Our Favourite Mortgage Comparison Sites

Want To Talk To A Human?

If you have some questions about which type of mortgage is right for you, we'd suggest talking to a mortgage broker.

Which? Mortgage Brokers are impartial as they don't work on commission. They can answer your questions if you're a first time buyer, refinancing, buying-to-let or moving homes.

Get your free initial consultation.

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