There are many different types of mortgages available. Here we break down what they are and how they work.

As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.

Fixed Rate

The interest rate you pay on a fixed-rate mortgage stays the same for a specified period of time, so your mortgage payments will stay the same even if interest rates rise. This form of mortgage is frequently available for two, three, five, or 10 years, and it gives you the assurance that your payments will be consistent throughout the period.

If you choose a fixed-rate mortgage, you'll need to start thinking about your next mortgage a few months before your current one expires, since once it does, you'll be switched to your lender's Standard Variable Rate (SVR), which usually means a higher rate.

Variable Rate

Standard Variable Rate

The interest rate used here is the lender's standard variable rate, or SVR (SVR). As the name implies, the interest rate can fluctuate at any time, which means your monthly payments could change as well.

There is normally no early repayment charge with this form of contract, so you can switch to a different sort of mortgage at any moment and perhaps overpay your mortgage to pay it off faster and reduce the term. Variable rate mortgages, on the other hand, may fluctuate if the Bank of England base rate rises or falls, making it more difficult to budget for your payments. In many cases, there are better and more cost-effective options available on the market.

Tracker Rate

A tracker mortgage is a form of variable rate mortgage that follows a predetermined interest rate, typically the Bank of England base rate. The interest rate you pay on your mortgage will be a fixed rate above or below the rate tracked. If the rate you're tracking rises, your mortgage rate will rise by the same amount. And it will decrease when the rate being tracked decreases.

Discount Rate

A discount rate mortgage is a sort of variable rate mortgage in which the interest rate is set at a lower rate than the lender's Standard Variable Rate (SVR) for a defined period of time, usually two or three years.

The obvious advantage is that the rate is lower, resulting in reduced repayments. However, if interest rates rise, your repayments will likely rise as well. You should also be aware that lenders' SVRs vary, so you may require assistance in determining which discount programme is the most appropriate and cost-effective for you.

Capped Rate

A variable rate mortgage with an interest rate ceiling, or cap, above which your payments will not climb. The interest rate is typically greater than other variable and fixed rate mortgages, and the ceiling can be set extremely high. It does, however, guarantee that your payments will not exceed a particular threshold.

In most cases, a capped rate is only available for a limited time, usually between two and five years.

This form of mortgage may also have a minimum interest rate that the lender will charge for a set length of time. A 'collar' is the term for this.

Offset

You can utilise your savings to minimise the amount of interest you pay on your outstanding mortgage debt with an offset mortgage. It connects your savings account, as well as your checking account in some situations, to your mortgage.

This means you pay less interest on your mortgage instead of gaining interest on your savings. If you have a £125,000 mortgage and £25,000 in linked accounts, for example, your monthly mortgage interest will be computed on £100,000 rather than the balance of £125,000.

While an offset mortgage can save you money and shorten your loan term, it can also be more expensive than comparable agreements, with fewer options.

Repayment

This is the most popular and widely-available option, where you make monthly repayments for an agreed period of time until you’ve paid back both the mortgage capital and the interest.

With a repayment mortgage, or capital repayment mortgage, to give it its full name, you pay back part of the mortgage capital and interest each month. At the outset, most of your monthly payments will comprise of interest; over time, more of your monthly payment will be repaying the capital.

With a repayment mortgage, you are guaranteed to repay the full mortgage by the end of your mortgage term, provided you make your repayments in full each month.

Interest only

With an interest-only mortgage, each month you only pay the interest outstanding on the mortgage, meaning that the capital sum remains the same throughout the period of the mortgage. You don’t pay off any of the capital until the end of the mortgage term.

This means that you will need to make other arrangements for paying back the capital sum. These mortgages are not as widely available as they once were. Lenders will now only lend money in this way if the borrower can clearly demonstrate how they propose to repay the capital sum at the end of the mortgage term.

Part & part

A part & part mortgage is where one section of the loan is on a repayment basis, and the second part of the loan is on an interest-only basis.

Specialist mortgages

Some borrowers have more complex borrowing needs. These are some of the more specialist mortgages that are available.

Expat Mortgages

Lenders generally consider expat mortgages to be higher risk due to the difficulty in assessing your financial stability. As a result, your choice of lenders and products will be restricted, and you should expect to pay a higher rate of interest than for a standard mortgage.

If your main source of income is earned overseas, it can be difficult for a lender to assess this accurately, due to fluctuating exchange rates. The lender may also find it hard to get relevant information to establish how secure your income is.

When applying for any type of mortgage, lenders will look at your credit score. For expats who may have lived abroad for some time, a credit history may not be available. The lender will therefore need to undertake other checks and you should be prepared to provide additional documentation.

It’s therefore important to get specialist advice if you are looking for an expat mortgage or expat buy-to-let mortgage.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments. The Financial Conduct Authority does not regulate some forms of Buy-to-Let mortgages.

Foreign National

If you aren’t a UK citizen, you can still apply for a mortgage, although your choice of lenders and products will be restricted. As is the case when applying for a standard mortgage, the lender will check your credit history, so you should try and build up your credit score by opening a bank account, registering to vote and paying bills on time. If you have recently moved to the UK, it might take a while to build up a sufficient credit score before a lender will consider your application.

Sharia Mortgages

Home purchase plans which comply with Sharia law allow you to buy a home without paying interest.

The lender buys the property on your behalf and is the legal owner. You then make monthly payments to the lender which are a combination of rent, charges, and capital repayment. No interest is payable.

At the end of an agreed fixed term you buy the property from the lender for the purchase price they paid initially; you then become the sole owner of the property.

There are two types of Sharia mortgage:

• Ijara or Ijarah: The monthly rent and capital payments are held by the lender to purchase the property at the end of the term, so your share of the property remains constant throughout the term.
• Diminishing Musharaka or Musharakah: You and the lender own the property jointly, with separate stakes. The monthly rent and capital payments go to purchase more of the lender’s share. As your stake in the property increases and the lender’s decreases, your rental payment decreases.

Sharia mortgages are complex products that advice and since 2014 any lender offering these products must offer you an advised service. This involves an assessment of your finances and recommendation of a product only if is suitable and affordable. The advice also must assess whether a conventional mortgage is more suitable.