What type of mortgage to choose?

Fixed, variable, tracker... types of mortgage explained

✅ If interest rates rise elsewhere, you won't see your rate or payments increase.

✅ As you'll know exactly what you'll pay, you can budget around it.

❌ If interest rates fall elsewhere, you won't see your rate or payments drop.

❌ Leaving a fixed deal early will usually incur a high penalty.

If a fixed rate sounds good, think carefully how long you want the deal to last. Ideally, you don't want to leave a fix early, as there will usually be an early repayment charge to pay.

Quick question:

Variable type one: tracker mortgages

With a tracker, your mortgage 'tracks' a fixed economic indicator – usually the Bank of England base rate. This means trackers usually move when the base rate does.

Trackers usually track above the base rate. For example, a tracker might track at the base rate plus 0.5 percentage points – so if the base rate is 4%, the tracker rate will be 4.5%. Then, if the base rate changes, so will the tracker, by the same amount.

Normally trackers are popular in times of falling interest rates (as tracker rates tend to go down), but less so when interest rates are going up (as tracker rates tend to go up).

Here are the pros and cons of a tracker:

✅ Transparency – only economic change can move your rate.

✅ If interest rates are cut, your rate will likely drop too.

❌ In interest rates increase, your rate will likely go up too.

❌ Trackers are normally more expensive than the cheapest fixes.

Quick questions:

Variable type two: discount-rate mortgages

Discount mortgages usually offers a discount off a lender's standard variable rate (SVR – more on this below). For example, a '2% discount' is likely to be 2% off its SVR of 7% – in other words 5% – not a rate of 2%. Be careful with the details and check what you'll pay.

Discount deals tend to last for two or three years, but there are some longer options.

Here are the pros and cons of discount mortgage deals:

✅ If interest rates are cut, your rate might drop too.

❌ There's no guarantee your lender will reduce its SVR even if the base rate goes down.

❌ Lenders can hike an SVR at will, meaning your rate could go up.

You should bear in mind that lenders' SVRs can vary. This means it's not just the size of the discount that counts, but the underlying rate you pay too.

Quick questions:

Variable type three: standard variable rate (SVR) mortgages

Each lender has what's called a standard variable rate (SVR). This is the rate you'll be moved to after your current mortgage deal ends – unless you actively switch to a new deal. 

SVRs are often the most expensive type of mortgage deal out there, with rates way above those of the cheapest fixed and variable deals elsewhere. Currently, SVRs tend to be in the region of 6.5% to 7.5%, though rates can vary significantly between lenders.

Plus, SVRs are risky as you don't know if and when the lender will change the rate. Though SVRs tend to roughly follow the Bank of England's base rate, ultimately they can be changed at a lender's whim, whether that's for commercial or economic reasons.

Here are the pros and cons of an SVR:

✅ If interest rates are cut, your rate might drop too (though this is not guaranteed).

✅ There's usually no penalty or charge to leave an SVR.

❌ If interest rates rise, the SVR is likely to rise too (though this is not guaranteed).

❌ SVRs are normally far more expensive than fixed and other variable deals.

There are some scenarios where it may be worth moving on your lender's SVR rather than switch mortgage deal. For example, if you've only got a small amount of your mortgage left to pay. This is because, with switching fees high, you are less likely to make a saving.

Let's say if you've only £25,000 left to pay on your mortgage and fees to switch deal are £2,000, you'd be spending almost 10% of what you owe to switch deal.

But other than in this type of scenario, an SVR is unlikely to be the best option.

Quick question:

How long do you want the mortgage deal for?

"How long do you need the certainty for?"

This is most relevant to a fixed-rate mortgage, as your monthly payments are fixed for that time. Generally speaking, the longer you fix for, the higher the interest rate. But if you need the certainty of knowing what your payments will be, a fixed mortgage will do this for you.

So the less spare cash you have to meet potential interest rate rises and the more you value budgeting certainty, the more you might hedge towards fixing, and fixing for longer.

Here are some other things to consider when deciding what length deal to go for:

1. Check a two-year deal is actually a two-year deal

Many mortgage deals will have a name that states the initial rate will last a certain number of years – like a 'two-year fix' – but will actually have a specified end date.

So depending on how long it takes for the mortgage to complete (the point at which you draw down the money and the mortgage rate kicks in), you could end up with a deal that lasts months less (or more) than you anticipated. Therefore check the details carefully.

Don't just rely on the name of the mortgage deal. Make sure you check the section that details the rate. If it has an end date, it'll look something like this:

4.5% fixed, ending 31/4/2028

2. Mortgage fees can add up if you regularly switch deals

Mortgage deals that last two years are popular because they often have the lowest interest rates. But their fees tend to be just as high as longer deals. So think about it...

Let's say, over a 10-year period, you take out five two-year mortgage deals, paying a £1,500 arrangement fee each time. This means paying £7,500 in fees alone. But if you opted for two five-year deals, paying a £1,500 arrangement fee each time, you'd save £4,500 in fees.

And be aware that fees can turn out more expensive if you can't pay them upfront, as you'd have to add them to your mortgage debt and pay interest on them for many years.

For these reasons, don't ignore fees when choosing a mortgage deal / length.

Read our Mortgage fees guide for more on the cost of setting up a mortgage deal.

3. Interest rates on longer-term deals can be competitive

A loose pattern exists: the longer the fixed deal, the higher the interest rate. This is because lenders are guaranteeing your rate while taking on the risk that rates will rise in the future.

However, for a few years now this pattern has been more blurred. It means the gap in cost between shorter-term fixed deals and longer-term fixed deals is smaller than before.

Currently there are some five-year fixed deals out there which have cheaper interest rates than two-year fixed deals, while many others are in the same ballpark. There are even some 10-year fixes that are not that far off the rates of the cheapest two and five-year fixes.

Therefore it's always worth comparing different length deals and their interest rates.

4. But only fix long term if you're not planning on moving

Don't automatically plunk for a long fix just because it's got a good rate. There are other things to consider as well before you lock in a mortgage for five or 10 years.

One of these is whether it's likely you'll want to move home before the fixed deal ends. In the scenario you fixed your mortgage for five years but decide to move home three years later, if you're unable to port your mortgage then it's likely you'll end up having to pay an early repayment charge (ERC) in order to move – a charge that can cost £1,000s.

So think carefully before picking a cheap long-term fix for your one-bed flat if you have a partner and are planning on starting a family and will need a bigger home soon. While many mortgage deals are portable in theory, there's no guarantee a lender will agree to it.

You'd need to pay an ERC where you:

• Pay off the mortgage in full early. For example, you want to move home but can't port your mortgage, meaning you'd need to repay it and take out a new mortgage in order to move; you inherit money and want to clear the mortgage; you want to remortgage; or

• Pay the lender back more than you're allowed to. Any payment above your regular monthly repayment is called an overpayment. Most lenders allow you to overpay by a certain amount each year (usually 10%), but bust this limit and you'll be hit with an ERC.

Read our Should I fix my mortgage for 5/10 years? guide for everything to consider.

Quick questions:

When do you want to clear your mortgage by?

As well as choosing how long you want your fixed or variable deal to last, you need to decide when you want to finish paying off the mortgage – this is your 'mortgage term'.

Your term is an important factor, as it will have a big impact on the total mortgage cost.

Historically, the most common mortgage term is 25 years. But a term can be less than this, as well as more – first-time buyers increasingly plunk for terms of 30, 35 and 40 years these days. However, lenders might cap the term if you plan to take it past retirement age.

For most mortgages, there are two key factors to consider when deciding on the term:

1. The shorter your mortgage term, the higher your monthly repayments will be...
2. Yet the trade-off is your mortgage will cost you less overall.

The reverse is true too. So the longer your mortgage term, the smaller your mortgage repayments will be. Yet the trade off is your mortgage will cost you more overall.

Here are a couple of other factors to take into account:

• How old will you be when the term ends? Some lenders won't allow you to take a mortgage into retirement age, others will. This might impact how much you can borrow.

• A longer term can add £1,000s to the cost. While a longer term means your monthly repayments will be smaller, what you pay overall for a mortgage can be far greater. For example, if you repaid a £200,000 mortgage over 25 years at 4%, you'd repay £315,000 in total. But if the term was 35 years, it would cost you £370,000 overall.
  
  Not only will you repay more with a longer term, but it's also likely you'll shell out more in mortgage fees too, as you'll probably switch deal more times over 35 years than 25.

Use our Basic mortgage calculator to experiment with the impact of a mortgage term.

Repayment or interest-only mortgage?

• You only repay the interest each month. Your monthly repayments don't chip away at your actual debt, it just covers the cost of borrowing that money. So if you've got a £150,000 mortgage over a 25-year term, after 25 years you'd still owe £150,000.

• You repay what you've borrowed at the end of your mortgage term. Using the example above, you'd need a plan for how to repay that £150,000 after 25 years.

As mentioned, lenders will want to see evidence of a convincing method to build up enough money to pay off the actual cost of the property at the term end (such as through savings).

See our Interest-only mortgages guide for more on how they work.

Choosing repayment is the way forward for most...

Not only is it difficult to get an interest-only mortgage aside, but unless you have a compelling reason, capital repayment should be the way forward. That's because:

• Although monthly costs are higher, it guarantees you owe nothing at the end of the mortgage term. Because you're actually repaying your debt each month. 

• As your debt gradually reduces, you pay less interest over time. Whereas with an interest-only mortgage, the amount of interest you pay never changes.

• When you remortgage, your debt will be smaller. Which means you may be able to get a new deal with a better interest rate than what you're currently paying.

• You'll have a greater choice of mortgage deal. That's because lenders offer far fewer types of mortgage deal to borrowers opting for an interest-only mortgage.

Want a more flexible mortgage?

The most popular flexible feature is the ability to overpay. This means paying more than your agreed monthly repayment, whether regularly, in a lump sum, or from time to time.

Overpaying can result in clearing your mortgage debt more quickly, which in turn means paying less in interest. The impact of this can be huge, as the example below shows...

If you have a £150,000 mortgage, paying 5% interest over a 25-year term, you'd repay £113,000 in interest alone over that time. But if you overpay by £100 each month, you'd clear the mortgage four years and seven months sooner and save £23,350 in interest.

Most mortgages allow you to make some form of overpayment. However, the amount you can overpay by is usually limited – typically to 10% of your outstanding balance each year, or a fixed amount each month, or even when and/or how often you can overpay.

So you need to think whether you're likely to want to overpay in the first place, and – if so – how much you're likely to want to overpay by. If you want to overpay by as much as you want, penalty-free, then your choice of mortgage products will likely be more limited.

For more on how overpaying works, see our Overpay your mortgage guide.

'Borrow back' facilities

If you overpay a mortgage, a few lenders will allow you to get the overpayments back if needed – though they don't always shout about it, making it a hidden bonus.

You can effectively use your mortgage as a high-interest savings account. By leaving money in it temporarily, the net effect is the same as earning interest tax-free at the mortgage rate.

Payment holidays

Here, the lender will allow you to stop repaying the mortgage when you want. But be careful. Lenders don't let you do this from the goodness of their hearts.

Some lenders insist you've overpaid first (so it's the same effect as borrow-back). Even if it doesn't, interest will continue to be charged, meaning your mortgage debt will start to grow.

Typically, borrowers taking a 'holiday' arrange to miss one or two payments, after which monthly payments are recalculated to spread the cost of the missed payments across the remaining mortgage term – in other words, your repayments will go up.

In addition, there could also be an extra penalty or administration charge on top.

Before taking any payment holiday, you must seek permission from your lender first.

Offset mortgages

Quick question:

Current account mortgages

This type of mortgage is rare these days. Here, your mortgage is combined with your current account, meaning you've got one overall balance.

Here's an example:

• Let's say you have £4,000 in your current account and a mortgage of £150,000, this means you're effectively £146,000 overdrawn. The debt reduces after your salary is paid in, and it then creeps up as the month wears on and you spend your salary.

• You make a fixed repayment each month. Meanwhile, the more money you've got in your current account, the less of your mortgage debt that will be subject to interest payments, helping you to clear the mortgage debt sooner.

• Any extra cash savings can be added to reduce the balance further. However, many people don't like constantly seeing a huge debt figure in their current account.

If you find a lender that offers this type of mortgage, unless you have huge fluctuations in salary and big bonuses, it'll likely only offer a small saving compared to an offset mortgage. Plus, the interest rates on current account mortgages have historically been expensive.

Sole or joint mortgages

Quick questions:

How do guarantor mortgages work?

If you want to apply for a mortgage by yourself but a mortgage lender isn't willing to lend you the amount of money you need (you don't earn enough, or it thinks you'll be stretching your affordability too far), a guarantor mortgage could get you the loan amount you needed.

A guarantor will typically need to be a close family member, such as a parent. The guarantor then either:

1. Promises to make your mortgage payments in the event you fail to do so.
2. Joins your mortgage application as a joint applicant and their income forms part of your affordability assessment.

In both cases, the guarantor doesn't actually own the property so is not on the title deeds, but they have signed a legal contract with your mortgage lender.

This means if you don't make your payments, the lender is free to pursue the guarantor as well, even forcing them to sell their own home to make your repayments. This is a huge commitment, so check your guarantor fully understands what they're signing up to. The lender will want your guarantor to seek independent legal advice before signing (to make sure they can't worm out of the contract later by saying they didn't understand).

What does 'joint borrower, sole proprietor' mean?

Similar to guarantor mortgages is what's known as a 'joint borrower, sole proprietor' (JBSP) mortgage – though not many lenders offer them.

Here, like guarantor mortgages, a family member or friend can join your mortgage application and their income will be taken into account by the lender, meaning you're more likely to be accepted and even potentially be able to borrow more. Again, like a guarantor mortgage, it'll only be your name on the property. The main difference is that with JBSP mortgages both you and the family member/friend are jointly responsible for mortgage repayments (whereas with a guarantor mortgage, the guarantor only becomes responsible in the event you can't pay).

A JBSP mortgage is a huge commitment for the person who joins your mortgage application. For example, not only are they jointly liable for the mortgage repayments, the mortgage will appear on their credit file and potentially impact their ability to access credit. So if a JBSP mortgage is something you're considering, it's best all parties speak with a mortgage broker first.

Barclays offers its version of lending like this called Mortgage Boost.