Which Is Best For You? – Forbes Advisor UK

When house hunting, finding the place of your dreams is only half the battle. Unless you’re buying outright, the biggest challenge is likely to be finding a suitable and affordable mortgage. But how do you know which type of mortgage could be the best fit for you?

As well as weighing up your cash deposit amount against how much you can afford to borrow, you’ll need to decide whether you want a fixed or variable rate mortgage – and over what length of term.

If you’re already a homeowner and looking to remortgage, you’ll also want to consider all available options.

To help you choose a mortgage with greater confidence, here’s a round-up of the different types.

Interest-only vs repayment

Mortgages can be taken out on either an interest-only or repayment basis. As the name suggests, with interest-only, this means you’ll only pay the interest on the loan in your monthly payments to the lender. 

A repayment mortgage, in contrast, means you pay the interest on the debt as well as a portion of the capital with your monthly repayments. It means that at the end of the mortgage term – such as after 25 or 30 years – the debt will be repaid in full.

With an interest-only mortgage the capital (the original debt) is not being repaid – you are only servicing the interest owed. This means that borrowers will usually have to give evidence to the lender of how they intend to repay the debt at the end of the term, such as through savings in an ISA, for example. 

Interest rate types

When deciding on your mortgage deal you’ll need to think about whether you want a fixed or variable rate of interest. Here’s more detail on each:

The interest rate on the mortgage is fixed for a set period of time, such as two or five years, for example. It is possible to get a 10-year fixed rate and sometimes fix for even longer. 

The interest rate you pay remains the same for the duration of the deal. This can help with budgeting as you know your monthly repayments won’t change.

The fixed rate you’ll pay will depend on the amount of cash deposit you can put down towards your home purchase, or the equity you have in your home (for remortgage). This is known as the loan to value ratio, or LTV. 

If you have a high LTV (for example you only have a 10% cash deposit or equity, so the LTV is 90%) then you’re likely to pay a higher fixed rate on your mortgage, compared to a borrower with a lower LTV.

The length of the fixed rate deal will also impact on the cost. As a general rule, short term-fixed rates tend to be cheaper than long-term fixes – but this may not always be the case. In recent years as interest rates have been rising, five-year fixed rates have tended to be cheaper than two-year rates, for example.

There will usually be arrangement fees to lock into a fixed rate mortgage (more on fees and charges below) and early redemption penalties if you want to switch away from the deal during the fixed rate term.

This is a variable or floating rate of interest. This means the mortgage rate – and therefore your monthly mortgage payment – can rise and fall during the life of the deal, which could be two years or five years, for example. 

With a tracker mortgage deal the rate is linked to the Bank of England Bank Rate, tracking the movements of this rate exactly. That means if the Bank Rate goes up, the mortgage tracker rate will rise by exactly the same amount, and conversely it will fall when Bank Rate is reduced.

Typically tracker mortgage deals track at a margin above the Bank Rate. So for example if the tracker rate was Bank Rate plus 1.5% and the Bank Rate is at 5.25%, your mortgage pay rate would be 6.75%.

In some cases the lender will put ‘book ends’ on tracker rate deals known as collars and caps. A collar (sometimes known as a floor) is the lowest rate you’ll ever pay – even if Bank Rate was to fall to 0%.  

A cap is the reverse – it is a ceiling, above which the mortgage rate will not climb regardless of what happens to interest rates.  However, most tracker rate deals don’t have a cap.

Arrangement fees and early redemption penalties will often apply on tracker rate deals. But some deals may offer built-in flexibility, such as the option to switch to a fixed rate with the same lender at any time without incurring a penalty.

With a discounted rate deal the mortgage rate is variable, but instead of tracking the Bank of England Bank Rate, the rate is linked to the lender’s standard variable rate, called SVR (more on SVR below). They tend to be a lot less popular than tracker deals.

The mortgage deal will be a ‘discount’ on the SVR, meaning the rate will track below the SVR. But SVRs can be high, and are typically higher than Bank Rate. A typical example might be a deal that is 2% below the lender’s SVR, so if the SVR is 8%, for example, then the mortgage pay rate would be 6%.

The borrower’s mortgage rate will rise and fall when the lender changes its SVR. The changes may be more or less than any increases to Bank Rate, so there is less certainty around how the rate will change, compared to a tracker deal.

Collars or floors (as mentioned above) are sometimes put in place for discounted rate deals in the same way as for tracker rate deals. Capped rate mortgage deals are discounted rate deals that apply a cap, or rate ceiling, above which the mortgage rate cannot climb.

Arrangement fees and early redemption penalties will often apply on discounted rate deals. 

• Standard variable rate (SVR)

All mortgage lenders have a standard variable rate or SVR or the equivalent. This is the variable rate which borrowers revert to when they come to the end of a fixed, tracker or discounted rate deal. 

While SVRs are likely to be higher than the best fixed and tracker rates available, there are usually no penalties to switch away from SVR.

What is an offset mortgage?

An offset mortgage is a form of flexible mortgage that allows you to link your savings to your mortgage. The savings are not used to pay off the debt. Instead they offset the mortgage so you only pay interest on the balance.

Borrowers can usually choose to either use the offset facility to reduce their monthly mortgage repayment (by offsetting their savings they can bring down the interest payable on the mortgage balance), or they can keep their monthly payments the same, effectively overpaying each month, with the aim of paying off the debt faster.

Offset deals are available as fixed or tracker rates. The downside is that offset mortgages typically have slightly higher interest rates than standard mortgage deals as you’re paying a slight premium for the functionality of offsetting.

Offset mortgages tend to suit those who have significant savings that would work harder offset against a mortgage debt, than earning interest in a deposit account. A small number of lenders have offset deals, including Barclays, Coventry Building Society and Yorkshire building society.

Mortgages for first-time buyers

There are a range of specialist mortgage types as well as government and private sector schemes aimed at helping first-time buyers on to the property ladder.

Skipton building society offers the only 100% mortgage currently on the market which does not require a guarantor. It means the property buyer does not need to put down any cash deposit towards their purchase.

However, there are a number of terms and conditions for Skipton’s Track Record deal. To be eligible, borrowers must be genuine first-time buyers (or have not owned a property for at least three years) and be able to demonstrate a 12-month track record of making monthly rental payments.

How much borrowers can get as a mortgage is linked to how much they have been paying in rent. Maximum loans under the scheme are £600,000 (not applicable for new build property or in Northern Ireland).

• Mortgage Guarantee scheme

The government-backed mortgage guarantee scheme supports lenders to offer 95% loan to value mortgages to borrowers with just a 5% cash deposit. Most major mortgage providers will lend at 95% LTV under the scheme (the lenders can purchase a government guarantee for the debt which covers any potential losses), which has just been extended by the government to the end of June 2025.

This is a scheme launched by house builders in partnership with major mortgage lenders to enable buyers to purchase a new-build home with a 5% deposit.

With a guarantor mortgage, the home buyer can boost their borrowing power, even borrowing up to 100% loan to value in some cases, by having a guarantor on their loan. Guarantors, who are typically close family members, such as a parent, agree to cover the full mortgage debt in the event the borrower cannot pay.

• Shared equity/shared ownership

Shared equity or ownership schemes are a way of buying a portion of a first home, while a third party, usually a local housing association or the government, provides the remaining portion as an equity loan. It is a way of helping FTBs on to the housing ladder with a smaller cash deposit and smaller mortgage. 

The Help To Buy scheme, now closed, was a popular recent shared equity scheme. 

Green mortgages

A green mortgage is one that offers incentives, typically a lower mortgage rate or cashback on completion of the mortgage, for borrowers in homes with an energy performance certificate (EPC) rating of A or B for residential homes  (A to C for buy-to-let properties).

Most homes with A and B EPC ratings tend to be new-build properties, which have been built with energy-efficient materials and design in mind. But it may be possible to improve a property’s EPC rating by making eco-friendly home improvements.

Buy-to-let mortgages

A buy-to-let mortgage is for landlords or owners of second homes who want to purchase a property and let it out to tenants. Buy-to-let deals can be fixed, tracker or discounted rate, and they typically have fairly large fees to set up. In many cases the arrangement fee will be a percentage of the mortgage loan, such as 5%, for example.

On average, BTL mortgages charge higher rates than residential mortgages. But it is possible to find competitive rates and deals by shopping around or using a broker, such as our mortgage partner Better.co.uk.

There are BTL deals for landlords with one property, holiday lets and overseas homes, for example, and also mortgage loans for professional landlords and owners of multiple properties.

Mortgage fees and charges

Most mortgage deals, particularly the most keenly priced fixed and tracker rate mortgages, will charge an arrangement fee when you take it out. A typical fee on a low rate two-year fixed mortgage, for example, might range from around £500 to £1,500. But fees can be higher. In some cases a lender may offer a fee-free deal, but usually the borrower will pay a slightly higher interest rate. 

It is important to factor in the cost of any upfront fees as well as the headline mortgage rate when comparing different deals. The figure you need to use for comparison is the total cost (rate plus fees) over the term of the deal.

There are also likely to be early redemption charges (ERCs) if you want to leave a fixed or tracker rate deal early (before the end of the term of the deal). 

These charges are usually a percentage of the mortgage balance (such as 2% or 3% for example) although some reduce over time, so the ERC may be 5% in year one of your five-year fixed rate deal, but reduce each year until it is 1% in year five, for example.