Fixed rate? Tracker? Offset mortgages? What does it all mean!? 🤔
While you save for your first home, here’s a crash course in the different mortgage types out there (and what they’re best for).
What’s a repayment mortgage?
🏆Best for: Spreading the cost over time.
A repayment mortgage is the most common one — each month, you pay back the value of your home, plus interest.
What’s an interest-only mortgage?
🏆 Best for: Having smaller monthly repayments to begin with.
With an interest-only mortgage, you only pay the interest month-by-month, then pay the full amount at the end of the agreed term (e.g. in 25 years) or if/when you sell.
P.s. Lenders rarely give interest-only mortgages to first-time buyers — but hey, it could happen.
What’s a standard variable rate mortgage?
🏆 Best for: Challenging lenders to be more competitive with their rates.
With a standard variable rate mortgage (SRV), you pay exactly that — the lender’s standard rate. This means it’s a rate with no special discounts or deals.
The lender chooses what their standard rate will be and it can change at any time. This means your repayments can go up or down, based on the rate they set. Often, lenders reference the current economy and the base rate (e to make any changes to their own, but ultimately, it’s up to them.
Having this type of mortgage can make it difficult to set a consistent budget month-to-month, but it has its upsides too. Standard variable rate mortgages don’t have a lock-in period, which means you’re free to shop around for a better deal.
P.s. Typically, you’ll be moved onto a standard variable rate once your fixed rate or tracker mortgage ends (more on that below.)
What’s a fixed rate mortgage?
🏆 Best for: People who like a set monthly budget (for a while).
With a fixed-rate mortgage, the interest rate stays the same for a set period of time — 2, 5, 10 or even 15 years.
It’s basically a welcome offer — the home-buying equivalent of getting discounted broadband for the first year, then paying the standard price when that year ends.
What’s a tracker mortgage?
🏆 Best for: Jumping on an opportunity when the Bank of England base rates are low.
A tracker mortgage calculates its interest rate on the Bank of Englands’ base rate, plus a set percentage. Just like a standard variable rate mortgage, a tracker mortgage can go up and down, but it’s determined by The Bank of England, instead of your mortgage lender. That means the interest rate you pay depends on the health of the economy. As with a fixed-rate mortgage, tracker mortgages typically last for a few years, before changing over to standard variable rate. However, you can sometimes get a lifetime tracker mortgage.
What’s a shared ownership mortgage?
🏆 Best for: Getting on the property ladder with a smaller deposit.
With a shared ownership mortgage, you buy a share of a property (usually between 10% and 75%) and the other shares are typically owned by a housing association.
You live in the property just as you would with any other home you’ve bought — the main difference is that your monthly repayments are part mortgage, part rent.
Thanks to the government’s Shared Ownership Scheme, you can buy a home this way with a 5% deposit. And over time, you can buy back more of the shares and eventually own 100% of your home.
What’s a guarantor mortgage?
🏆 Best for: People who aren’t able to get a mortgage and can get help from financially-secure (and super generous) family
Getting on the property ladder can be tough. But if you’re finding it difficult to get accepted for a mortgage, you can go down the guarantor route.
With a guarantor mortgage, typically a family member legally agrees to cover your mortgage repayments if, for any reason, you can’t repay them. So a guarantor needs to prove that they’re in the financial position to take that on.
What’s an offset mortgage?
🏆 Best for: Those who already have some hefty savings.
An offset mortgage is a type of mortgage that’s linked to one of your savings accounts.
Lenders use these savings to ‘offset’ the amount you need to repay on your mortgage. And so, you only pay interest on what’s left.
- Property value: £250,000
- 20% deposit: £50,000 (no interest to pay on this)
- Savings: £20,000 (no interest to pay on this)
- Mortgage: £180,000 (only pay interest on this)
Instead of putting all your money into a deposit, you can keep some in your savings account and access them when you need to (without remortgaging your home).
What’s a flexible rate mortgage?
🏆 Best for: Riding the wave of financial ups and downs.
A flexible rate mortgage gives you the chance to overpay, underpay, take a break from your mortgage and even borrow money back from your mortgage (if you’ve overpaid previously).
P.s. A lot of mortgages have these flexible features built in.
What’s a buy-to-let mortgage?
🏆 Best for: People who want to make an income from their first home.
What if you want to buy your first home, but you want to rent it out to someone instead of living in it yourself? Well, there’s a mortgage for that.
Typically, lenders view this type of mortgage as higher risk if you’re a first-time buyer, so it could be more difficult than securing a mortgage for a home that you’ll live in.
P.s. You also can’t use your Lifetime ISA for a buy-to-let mortgage
Now that you know about the types of mortgages that are out there for first-time buyers — what happens now? Well, if you need to save a deposit to secure your first mortgage, see how our app can help you get there sooner.