A capital and interest repayment mortgage is the most common type of mortgage being offered as it guarantees that the mortgage will be repaid at the end of the mortgage term. With this type of mortgage, you'll make monthly repayments for an agreed period of time (known as the 'term') until you've paid the loan off. In the early years of the mortgage, you will pay more interest and a small amount of capital off the mortgage balance every month, but as time passes by the monthly amount of interest paid reduces as the amount of capital repayment repaid increases meaning every month the outstanding mortgage balance will reduce.

With interest-only mortgages you only pay the interest you owe each month; you don’t pay off any capital.

At the end of the mortgage term, you'll still owe the full amount you initially borrowed. For this reason, lenders will want to know you have a robust repayment strategy in place. Otherwise, you'll have to sell the property repay the initial loan when the mortgage term ends.

Due to interest-only mortgages being more high-risk, they are usually offered to applicants with higher incomes. However, the majority of buy-to-let mortgages are structured on an interest-only basis.

A fixed-rate mortgage has an interest rate that remains unchanged (fixed) for a specific period of time. How long the mortgage is ‘fixed’ for will depend on your requirements. For example, you could have a:

1 year fixed-rate mortgage
2 year fixed-rate mortgage
3 year fixed-rate mortgage
5 year fixed-rate mortgage
7 year fixed-rate mortgage
10 year fixed-rate mortgage
15 year fixed-rate mortgage

Because the interest rate on a fixed-rate mortgage stays the same, your monthly repayments will remain the same during the fixed term period.

In comparison to a fixed rate mortgage, if you have a variable-rate mortgage, the interest rate can change at any particular point in time. Such fluctuations can make it harder to budget, as you don't know how much your mortgage repayments will be from month to month.

With a variable rate mortgage, the interest rate you’re charged can go up and down, so your repayments may be different each month making this type of mortgage product riskier than a fixed rate mortgage.

There are three main types of variable rate mortgage:

LENDERS STANDARD VARIABLE RATE MORTGAGE

A standard variable rate mortgage is set by your mortgage lender, and different lenders will have different rates, each choosing to put them up or down based on a number of factors.

The lenders Standard Variable Rate is not directly linked to the Bank of England’s base rate but are still likely to be influenced by any changes to it. Other factors that might lead to your lender changing your interest rate could be if their cost of borrowing changes, due to regulatory changes or because of internal business targets.

If you took out a fixed, discount or tracker deal, once it comes to an end, you are usually automatically switched onto the lender’s Standard Variable Rate, unless you choose to remortgage to another special deal period.  Often the Standard Variable Rate is the most expensive interest rate available, but there are benefits to them, such as flexibility to change mortgages at any time without paying an early repayment charge and the ability to make unlimited overpayments.

Tracker Rate Mortgage

A tracker rate mortgage has a variable interest rate based on a financial indicator. The Bank of England base rate is by far the most commonly used indicator by UK lenders, but there are other types of indices that are tracked. 

Your payments go up or down each month, depending on what happens to the indicator your rate follows. When interest rates rise or fall as a result of changes to the indicator, your repayments increase or decrease to reflect this.

Tracker rates are usually linked to the Bank of England’s base rate and any rise or fall in the rate will have an effect on the interest rate you are charged. Currently the Bank of England’s Monetary Policy Committee (MPC) meets every 6 weeks to set the Bank of England base rate.

Discount Rate mortgage

A discount mortgage is a home loan on which the interest rate is pegged at a set amount below the lender’s standard variable rate (SVR).

The interest you pay on your mortgage each month will therefore rise and fall in line with the standard variable rate (SVR) set by the lender, However, it will always remain a set amount cheaper for the term of the special deal period.

The mortgage rate discount can either be in place for a fixed period (special deal period) such as two, three or five years or for the lifetime of the mortgage.

However, with a discount variable-rate mortgage, the interest rate is usually set at one or two percentage points below the lender's standard variable rate (SVR). So, if your mortgage lender decides to change their standard variable rate (SVR), your discount mortgage rate will change too. Your monthly repayments can go up or down as a result.

For example, if your mortgage offers a 1.5% discount and the standard variable rate (SVR) is currently 5%, your interest rate will be 3.5%.

If your lender’s standard variable rate (SVR) goes up to 6%, your new interest rate will be 4.5%, and your repayments will increase.
If your lender’s standard variable rate (SVR) goes down to 4%, your new interest rate will be 2.5%, and your repayments will reduce.

The lender decides how and when to adjust its standard variable rate (SVR) based on several factors, including its borrowing costs and internal targets. And while not explicitly linked to the base rate set by the Bank of England, standard variable rates (SVR)  are often influenced by this rate.

Lenders also often impose a “floor”, or level below which your interest rate cannot fall, so your monthly repayments never drop below a certain amount.

An offset mortgage lets you use your savings to reduce the amount of interest you pay on your mortgage. How much you save depends on what you owe, your mortgage interest rate and how much you have in savings.

With a standard savings account you earn interest on your savings balance, but an offset savings account uses your balance to reduce the interest you owe on your mortgage balance instead.

You might find that your money works harder in an offset savings account, as the interest earned on savings may be lower than the interest paid out on a mortgage.

However, it's always worth doing some research to check whether you can find a savings account that pays out more in interest than you'll save with an offset mortgage to decide what the best option for you is.

With an offset mortgage, your repayments still go towards paying off both a chunk of the capital (what you borrowed) and some interest each month, but the amount of interest you owe is reduced by the value of your savings balance.

For example, if your mortgage is £200,000 and you have savings of £20,000, you'll still owe £200,000, you’ll only pay interest on £180,000 – as long as those savings remain in your offset account.

Here's how it works:

• You transfer your savings into an account with the same lender that you have your mortgage with and benefit from the interest reduction whilst it remains in there.
• You have full access to your savings, with the ability to add to or withdraw money as needed
• For every extra pound you save, you’ll pay interest on one pound less of your mortgage. However, be aware that if you take money out of your savings account, the opposite applies.

What types of offset mortgages are available?

Choosing an offset mortgage doesn’t usually limit your options in terms of the repayment type or deal type that’s available to you. You’ll still have the freedom of choosing from one of the options below:

Fixed-rate offset mortgages

The interest rate you pay after your savings have been offset is fixed for a set period with a fixed-rate mortgage, meaning your mortgage repayments stay exactly the same until the special deal period comes to an end.

Fixed-rate deals are beneficial if you need to stick to a tight budget as you know how much you need to pay each month during the special deal period. However, if interest rates fall, you won't benefit from a decrease in payments but if interest rates rise then you will benefit.

Fixed deals are typically offered for two to five years, but some lenders offer longer fixed-rate term options.

Variable-rate offset mortgages

After your savings are offset, the interest rate you pay is subject to change at any time with a variable-rate mortgage.

If you opt for a tracker mortgage, the rate is based on an external financial indicator, such as the Bank of England base rate. If the indicator goes up, so will your interest rate, but you’ll also pay less if it falls.

If you're on a discounted mortgage, the rate you pay is a set amount below the lender's standard variable rate (SVR). If the SVR rises or falls, so will your mortgage rate.

What are the advantages and disadvantages of offset mortgages?

There are advantages and disadvantages to every type of mortgage, and these will often vary depending on your own personal circumstances. Here are some of the main advantages of an offset mortgage: