What type of mortgage should you choose?

Understand the differences between fixes, variables, trackers and more to help you decide what's best

Updated 15 October 2024

Getting a mortgage is one of the biggest financial commitments you're likely to make. While the prospect can be exciting, navigating the market can be overwhelming – what with 1,000s of deals available and interest rates being high – so it's crucial to understand which mortgage will suit you. This guide outlines the different types of mortgages available and how they differ.

Fixed, variable, tracker: types of mortgages explained

There are many types of mortgage deals out there, but all fall roughly into two camps: those with a fixed rate and those with a variable rate – which includes tracker mortgages and standard variable rate (SVR) mortgages.

Fixed-rate mortgages

When you sign up for a fixed-rate mortgage, the lender agrees to give you a specified rate for a set period of time. Regardless of what happens to interest rates, with a fixed-rate mortgage your repayments will stay the same for the length of the deal.

Lenders call this the 'incentive period' – and these can be anywhere from two to 10 years, and sometimes even longer. It's even possible to find fixed-rate mortgages where the rate lasts for the full length of your mortgage.

Like all mortgage deals, fixed rates have pros and cons:

Certainty – your mortgage payments won't go up for the duration of the fix, no matter how high rates go.

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

If interest rates fall, you won't see your payments drop.

If you want to get out early, you'll usually pay high penalties.

If a fixed mortgage sounds good, think carefully about how long you want the fixed deal to last. Ideally, you don't want to leave the deal early, as there's usually an early repayment charge, which can add significantly to your costs.

What happens when a fixed-rate mortgage deal comes to an end?

At the end of the fixed period you can either choose to move to a new mortgage deal, or do nothing. If you do nothing, you'll be automatically moved on on to the lender's standard variable rate (SVR).

SVRs are usually substantially higher than fixed-rate mortgages, so you'll likely make decent savings by taking out a new deal with a better rate, either from your current lender (known as a product transfer) or from a new lender entirely (known as a remortgage).

The mortgage illustration you'll be given by the lender or broker will tell you what today's SVR is, but as the lender can change this at any time, there's no guarantee what the SVR will be when you reach the end of your fixed deal.

Variable-rate mortgages

Variable-rate mortgages can, and usually will, go up and down in cost. The main cause of this (although not the only cause), are changes to the UK economy.

In times of growth and inflation, interest rates tend to go up to discourage spending. In economic downturns, interest rates are often cut to encourage spending. The Bank of England's base rate can also influence variable mortgage rates, as can the longer-term economic outlook.

Variable mortgage rate deals fall into three categories: trackers, standard variable rates (SVRs) and discounts – below we explain each one in turn:

Tracker mortgages

With these mortgages the rate 'tracks' a fixed economic indicator – usually the Bank of England's base rate. This doesn't mean that tracker mortgage rates are the same as the base rate, just that they move in line with it.

A tracker mortgage usually tracks above the base rate. So, for example, a tracker mortgage might track at the base rate plus 0.5 percentage points – so if the base rate is 5%, the tracker rate will be 5.5%. Then, when the base rate changes, so does the tracker, by the same amount.

Normally tracker mortgages are popular in times of falling interest rates (as many benefit from the base rate being cut), but less so when interest rates are going up (as many lose out from the base rate increasing).

Here are the pros and cons of a tracker:

It's transparent – only economic change can move your rate, and if interest rates are cut, your rate will drop.

Uncertainty – if rates rise, so will yours.

You're locked in for the initial period, so if you're paying a rate several percentage points above the base rate and the base rate is hiked, it could mean huge future costs.

How long can I track for?

Trackers range in length, with the most common being two years, though there are a lot of five-year trackers too. Occasionally some lenders offer lifetime trackers.

There's usually a fee to pay if you leave before the fixed period ends. Lifetime trackers often don't have any early repayment charge, or only have one for an initial period. It varies, so check carefully.
Do trackers always follow the Bank of England base rate?

Some trackers don't follow the Bank of England base rate. Instead, they track the Libor rate (London InterBank Offered Rate), which is the rate at which lenders loan money to one another. Libor is more commonly used by 'sub-prime mortgages' and buy-to-let mortgages than standard residential ones, but watch for it.

Watch out for lenders who call their products 'trackers' but have their mortgage deals following a rate the lender controls.
Will my tracker only ever move when the rate it follows moves?

A true tracker should only move when the economic indicator it follows moves. But watch out for lenders describing mortgage rates as trackers and then including small print that lets them up rates for other reasons.

Get your lender and broker to confirm there aren't any conditions like this and check the mortgage offer document carefully yourself before you sign on the dotted line.

Standard-variable rate (SVR) mortgages

Each lender has a standard variable rate (SVR) which they can change when they like. Though they tend to roughly to follow the Bank of England's base rate, SVRs can be anything from two to five or more percentage points above the base rate (and can vary massively between lenders).

Critically, the SVR is the rate you'll be automatically moved on to after your fixed-rate or variable rate mortgage deal comes to an end – unless you actively switch to a new deal.

SVRs are often expensive, with average rates way above those of cheap fixes – right now SVRs tend to be in the region of 7% to 8%. Plus, they're risky as you don't know when the lender will move its rates – and it can move rates for commercial and economic reasons:

If interest rates are cut, your rate will likely drop too (although this is not guaranteed).

There is usually no early repayment charge, meaning the mortgage can be paid back in full at any point without penalty.

If interest rates rise, your SVR will almost certainly rise too.

While you can be on a cheap SVR, the likelihood is that, in this market, a cheap fix or variable rate will be significantly cheaper.

If you're on a costly SVR, but you've only a small amount left to pay, it may not be worth changing deal. This is because, with switching fees high, you are less likely to make a saving. For example, if you've only £25,000 left to pay on your mortgage and fees to switch deal are £2,000, you'll be spending almost 10% of what you owe to change.

SVR mortgages are rarely available to new customers, and even if they are, they're almost certainly not the best rates out there.

Discount-rate mortgages

This type of deal usually offers a discount off a lender's SVR. Most of the discounts on offer tend to last for a relatively short period – typically two or three years – but there are lenders offering longer, even lifetime options.

Yet be careful with the details, as they can be confusing. For example a '2% discount' might be 2% off its SVR of 8% – in other words 6% – not a rate of 2%. Check carefully what you'll pay...

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

Uncertainty – there's no guarantee your lender will move its SVR down if the Bank of England base rate goes down. So you might not get the full benefit of all rate changes.

You're at the mercy of lenders hiking SVRs at their will, which directly affects your rate.

Remember that because lenders' SVRs can vary, it's not the size of the discount that counts, but the underlying rate you pay.

What's the difference between a tracker and a discount mortgage?

A tracker follows the Bank of England base rate which is an independent economic indicator. This means your lender should only move your rate by the same amount and when the indicator moves. (Check the small print to make sure your lender hasn't left itself a loophole here.)

A discount is priced at a certain percentage below the lender's SVR. The percentage discount cannot change but the SVR can move willy-nilly based on the lender's own competitive reasons. The most important thing to remember is...

Lenders can do whatever they want with their SVRs. You have no guarantee on what'll happen with it.
Why do some variable mortgages have a 'collar'?

Between 2008 and 2010, the Bank of England base rate dropped from 5.75% to 0.5%. As tracker products were usually priced below the base rate, some borrowers did extremely well from this drop. But the lenders didn't do quite so well out of it, so some tried to limit their losses by applying a mortgage collar (minimum rate).

A collar stops the rate from falling below a minimum percentage rate – essentially, it's the opposite of a cap. If you opt for a variable mortgage, make sure you check if there's a collar. Ask your lender (or broker) outright AND check the key facts illustration and mortgage offer carefully.
How do I know if I'm getting the best deal?

As rates change over time, simply comparing the fixed and variable rates at the point you take your mortgage is a relatively blunt tool. To work out which is truly a better deal, look at how much interest rates would need to change before one deal beats the other. This is where a broker can really help you see the wood for the trees.

Martin's view: Fixed or variable rate mortgage?

MoneySavingExpert.com founder Martin Lewis

A fixed rate is an insurance policy against hikes and therefore gives peace of mind. That has to be factored into the equation. Though how much that peace of mind costs you is important too.

Yet a shock horror thought from the Money Saving Expert. Here, choosing a rate isn't purely about which is the cheapest.

Deciding whether to fix is a question of weighing up how important certainty that your repayments will stay the same is for you. I tend to think of this as a "how close to the edge are you?" question.

Someone who can only just afford their mortgage repayments should not be gambling with interest rates. They'll benefit much more from a fixed rate as it means they'll never be pushed over the brink by a rate increase during the term of the fix.

Those with lots of spare cash over and above the mortgage may choose to head for a discount or tracker, and take the gamble that it'll work out cheaper in the long run.

Yet if you do decide to go for a fixed rate on the basis of surety and later with hindsight realise a discount rate would've been cheaper, this doesn't mean it was the wrong decision. If you needed surety, remember, you got it. Even though the overall outcome wasn't what you wanted, you made the best decision based on the knowledge you had at the time.

- Martin Lewis, MSE founder and chair

What length mortgage deal – two, three, five, 10 years, longer?

Once you've worked out the type of mortgage deal you want, you'll then have to decide how long you want that deal to last.

The vast majority of mortgage deals are either two, three or five years. However, many lenders also offer deals which last seven or 10 years – and sometimes it's even possible to find deals which last for the life of your mortgage term (for example, 25 years).

But picking the wrong length can be costly, so it's worth thinking it through fully. There are many factors to consider before you choose, the key one being...

"How long do you need the certainty for?"

This is most appropriate with a fixed-rate mortgage, as your monthly payments are fixed for the term. Generally speaking, the longer you fix for, the more it will tend to cost. But if you need the certainty of knowing what your payments will be, a fixed mortgage will do this for you.

Therefore 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 of deal to go for:

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

Many products will have a name that states the initial rate will last a certain number of years, but will actually have a specified end date.

Depending on how long it takes to complete the mortgage (to draw down the money), you could end up with a product that could last months less (or more) than you anticipated. So check the detail carefully.

Don't just rely on the name of the mortgage product on the front page of the illustration. Check the section that details the rate, if it has an end date, it'll look something like this:

5.2% fixed, ending 31/12/2026

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

Mortgage deals that last two years are popular because they often (though not always, including now) have the lowest interest rates. But their fees tend to be just as high as longer deals. So think about it – over 10 years, if you have five separate two-year deals, you could be paying £7,500 in arrangement fees (£1,500 a deal).

But if you can get two five-year deals, then you'd only need to pay £3,000, potentially saving £4,500.

Fees can be even more expensive if you can't pay them upfront. You'd have to add them to your mortgage debt and pay interest on them for many years. Read our Mortgage fees guide for a full rundown of the kind of fees you'll need to pay to set up a mortgage deal.

3. Longer-term fixed deals are very competitive right now...

Until a couple of years ago, we'd got used to fixed mortgage rates following a loose pattern: the longer the fixed deal, the higher the rate. This was because the lender was guaranteeing your rate while taking on the risk that rates will rise in the future. This was something they were happy to do while the UK base rate, and long-term predictions of interest rates, remained low.

However, market uncertainty in 2022 changed this dynamic. The cost of fixed-rate mortgages went up, with many lenders offering longer-term fixes at lower rates than shorter-term fixes. And this is still largely the case today, reflecting that lenders expect the cost of borrowing to decrease over the long term.

Currently, some rates on the cheapest five-year fixed mortgages are on a par with, or lower than, the equivalent two-year fixes – with some 10-year fixed mortgages not far off either.

4. But if fixing long-term only do so if you plan to stay in your property

While rates on many five and 10-year fixes may be competitive right now, fixing for longer than five years isn't something to be done lightly – and you should never just decide on a mortgage based on the rate alone. See our Should I get a 10-year fixed mortgage? guide for all the things that need considering.

One risk of picking a cheap five or 10-year fix is where there's a good chance you'll want to move home before the fix finishes, as you might end up having to pay an early repayment charge (ERC) to your lender. For example, you'll need to pay an ERC in order to move property if your lender won't allow you to port your current fix to your new home (we've a whole guide on How porting a mortgage works).

So don't be swayed by a cheap long-term fix for your one-bed flat if you have a partner and are planning on starting a family and will likely need a bigger property in the near future. Beware that ERCs can be huge, as much as 5% of the loan (sometimes the equivalent to £1,000s), and will differ widely between products and lenders.

The charge will apply if you:

Pay off the mortgage in full. For example, if you inherit a pile of money and just want to clear the mortgage off; you remortgage, meaning you get a replacement mortgage with another lender; you want to move home but can't port your mortgage, meaning you need to repay it and take out a new one; or
Pay the lender back more than you're allowed to. Any payment over and above your normal, agreed monthly payment is called an overpayment. Most lenders allow you to overpay a certain amount (usually 10% of the outstanding debt – though check what your deal allows), but breach this and it could cost you.

If you have plans to pay off a lump sum that exceeds the overpayment limit then you'll need to weigh up the early repayment costs of doing that if you're tied in. It may be better to wait to pay the lump sum once the incentive period is over.

Important. You also need to consider the length of your MORTGAGE TERM – and the longer the term, the more you'll pay

As well as choosing the length of your fixed or variable deal, you also need to choose how long you want your mortgage to run for overall (known as the mortgage term). It's an important factor, and it's often overlooked.

Many people plump for 25 years, but it doesn't have to be that length of time. It can be less than this, or even 30, 35 or 40 years – indeed, term lengths of over 30 years are increasingly common these days.

If you've opted for a capital repayment mortgage (the vast majority of people do), there are two key elements to remember when picking your mortgage 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.

Use our Basic mortgage calculator to see how changing the length of your mortgage term will affect your monthly payments and the overall cost of your mortgage.

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

How old will you be when the term ends? Some lenders won't allow you to take a mortgage into your retirement period, while others will. Age is an important consideration, as you have to question whether you could you keep up with the repayments.
The longer the term is, the more you pay. Lengthening the term to, say, 35 years, means your monthly repayments will be smaller, but what you pay overall in interest will be greater. Shortening the term is a bit like overpaying – it makes the mortgage far cheaper. But a shorter term is only sensible if you've got the cash. So if the mortgage allows you to overpay, better to keep the mortgage term long to give yourself flexibility, then make overpayments.

With a longer mortgage term, not only will you pay more in interest, but you'll also probably pay more in mortgage fees too, as it's likely you'll switch deal more times over the course of 35-year term than a 25-year term.

Quick questions:

Am I free to switch deal after my fixed rate or variable rate ends?

Once your fixed or variable deal ends, in most cases you are free, and you should consider switching to a new mortgage deal. Otherwise you'll be shifted on to the standard variable rate (SVR), which is usually uncompetitive.

It's a good idea to start looking a few months before your mortgage deal ends to see if you can get a better rate by switching deal, as for every 1% of interest you cut per £100,000 of mortgage, that could be £80+ month saved. Full help in our Remortgage guide.

If your mortgage debt is low (and you only have a few years left until it's paid off) it might be worth sitting it out at the lender's SVR – as switching to a new deal often comes with fees will make it a more expensive option overall.
Can I take a mortgage deal with me if I need to move home?

If you think you might move home during the life of your mortgage deal (for example, in the middle of a five-year fix), you need to look for a mortgage deal that allows 'porting'. This just means that you can move the mortgage deal to another property without incurring an early repayment charge.

A deal that allows porting can be attractive if you want a long-term rate but aren't 100% sure you'll want to stick with the property for the length of the deal.

Not all mortgages are portable though, so do check. And even if your deal is portable, it still doesn't guarantee the lender will let you move. It can refuse your application to port for many reasons – for example, if it doesn't want to lend against your new property, you can't prove your income, your income's changed or you're in arrears.
What's an overhang?

One warning is that some mortgage deals can have an 'overhang', otherwise known as an 'extended tie-in' or 'extended early repayment charge'. These last for a period after your fixed or variable deal has officially ended, in other words, when you're on the higher SVR. Cheeky, but we've seen it happen.

They were used by lenders in the past so they could offer really attractive low initial rates, knowing they would recoup some of the money later. Uninformed borrowers got a nasty shock when they moved on to the SVR and found they'd still have to pay a sizeable charge to remortgage. These are rare now but do check, and try to avoid them.

You might be OK with an overhang if it gets your costs down low at the start, when you're first buying. But you need to be sure it's good value overall and that you can definitely afford it when the rate goes up.

Remember, you'd be going on to the SVR, which the lender can move at any time. That means it could be higher than illustrated, so you need to be sure you could cope. You might enjoy the initial low rate but will you really be happy when the rate bumps up?
Is it possible to get a ONE-YEAR fixed-rate mortgage deal?

A very small number of lenders – Barclays, Santander and TSB being the main ones – offer one-year fixed-rate mortgage deals, though they're normally only for existing borrowers.

There are a couple of other issues with one-year fixes: 1) The interest rates don't tend to be very good. 2) They sometimes come with set-up fees.

If you need to pay set-up fees on a one-year fix, bear in mind you'll only be faced with paying another tranche of fees to set up a new mortgage deal in 12 months' time.

This means you'd need the interest rate on the one-year fix to be really competitive to make it worth it. For example, if the interest rate is only marginally better than what you can get on, say, a two-year fix, then having to pay a second set of fees in 12 months' time is likely to wipe out any financial gain you make from being on a slightly better interest rate in the meantime – and possibly leave you financially worse off.

You can use our Compare fixed-rate mortgages calculator to tot up the cost of a one-year deal compared to a two, three or five-year deal (or longer).

What are the benefits of a one-year fix?

Homeowners might opt for a one-year fix if they believe interest rates are likely to come down and don't want to be tied into today's interest rate for too long. If interest rates fall significantly by the time a one-year fix is up, you'd benefit from being able to re-fix at a lower rate.

Fixed deals also give you price certainty, as you know your monthly payments are fixed for the duration of the deal. This doesn't apply to short-term tracker mortgages – a possible alternative to a one-year fix – which have variable rates of interest (meaning your monthly payments can change).

You might also opt for a one-year fix if you're sure you're going to move home in the next one or two years. But even if you are convinced you'll move, you could still plunk for a longer mortgage deal now and simply port the mortgage deal when you move (though there's no guarantee the lender will agree to this).

Repayment or interest-only mortgage?

You'll also need to decide how you want to repay the mortgage. There are two main types of mortgage repayment: capital repayment and interest-only. A third, much rarer, type – known as 'part and part' (which is a mix of the two) – also exists. Here's how the two main types work:

Capital repayment mortgages

The vast majority of borrowers opt for a capital repayment mortgage.

With this type of mortgage, your monthly repayments are calculated so you'll have repaid all the debt and the interest over the term you agree (for example, 25 years). It means your monthly payments cover the interest as well as chip away at the actual debt – so at the end you owe nothing.

This has a strange effect. In the early years, your outstanding debt is larger so most of your monthly repayments go towards paying the interest. Gradually, as you reduce what you owe, the balance shifts and most of your repayments go towards paying off the debt.

For example, on a £150,000, 25-year mortgage at 5%, you'll pay £877 a month. After 10 years you'll have made £105,240 in payments, but only reduced what you owe by £39,000. Yet after a further 10 years, having paid another £105,240 you've reduced the debt by a further £65,000. This is because less interest is accruing each year.

Many people, once they realise this, then worry that if they ever switch to another deal, they'll lose all the work they've put into decreasing what they owe. This isn't true. Provided you keep the same debt and the same number of years on your mortgage term until it ends (in other words, you have 14 years left to repay and you still intend to repay it in 14 years) it stays the same.

To see how your repayments would work in practice, check out our Ultimate mortgage calculator.

Interest-only mortgages

The alternative to capital repayment is an interest-only mortgage, though for many years now it's been very difficult to get your hands on an interest-only mortgage. You'll only be offered one if you've got a credible plan to repay the capital in future – meaning this type of mortgage is rare.

Here's how interest-only mortgages work:

With an interest-only mortgage you just pay the interest during the term. Your monthly payment doesn't chip away at your actual debt (the amount you borrowed) – it just covers the cost of borrowing that money. So for example, when the term (for example, 25 years) is up on a £150,000 mortgage, you would still owe £150,000.
You have to pay back the amount you borrowed in one lump sum at the end of the mortgage term. So if you get an interest-only mortgage, you NEED to have a separate plan to pay off your debt – by building up a lump sum elsewhere.

As mentioned, if you're considering an interest-only mortgage, the lender will want to see evidence of a convincing method you've set up (for example, savings) to build up enough cash to pay off the actual cost of the property.

For more information about this type of mortgage, see our Interest-only mortgages guide.

Important. Choosing repayment is the way forward for most...

Putting the fact that it's very difficult getting an interest-only mortgage aside, unless you have a compelling reason, repayment is the way forward. That's because with a repayment mortgage:

Although you pay more each month, it's the only option which guarantees you owe nothing at the end of the mortgage term. That's as you're actually paying off some of your debt every month.
As the outstanding capital gradually reduces, you pay less interest over the term. Whereas with an interest-only mortgage, the amount of interest you pay never changes.
When you come to remortgage, you'll have paid off more of the debt. This means you'll be able to get a mortgage with a lower LTV and hopefully a lower interest rate.
Choosing repayment means you'll have a greater choice of mortgage deal. Lenders offer far fewer types of mortgage deal to borrowers opting for an interest-only mortgage.

Want a more flexible mortgage?

It's also worth thinking about whether you want a mortgage that's more flexible, for example with a mortgage that allow you to over- or underpay, and borrow money back. Sometimes flexible features are included in the cheapest mortgages already, which is an added bonus.

Other times, you might need to take a higher-rate product to get the feature you want. You'll need to weigh up what you definitely need, what depends on cost and what doesn't matter as you'll probably not use it.

Our Mortgage best buys tool will show you the top mortgages that fit your criteria, and will tell you if your chosen mortgage has any flexible features. If you're looking for something specific, a mortgage broker might be able to help you find the right product. Here are some flexible features that mortgages can include:

Allowing overpayments

This is the most popular flexible feature – the ability to overpay. This just means paying more than your agreed monthly repayment – whether each month or just shoving a lump sum at your mortgage from time to time.

Overpaying can result in clearing the debt substantially quicker, so you pay less interest overall. The impact of this can be huge – see how much overpaying could save you.

If you had a £150,000 mortgage over 25 years at 5% interest, your monthly repayments would be £880. Over the term, you'd pay £113,000 in interest. If you overpaid by £100 a month, you'd repay the mortgage four years and seven months quicker, saving £23,350 in interest.

Most mortgages allow you to make some form of overpayment. So you don't always need something special (as special usually costs more).

However, they usually restrict the amount of money you can overpay – typically 10% of the outstanding mortgage/year, or a fixed max amount each month (do more and there are harsh penalties). Less commonly, they might restrict when and/or how often you can overpay.

So you need to work out how much you're likely to want to overpay by, and when you're likely to want to overpay.

Timing your overpayment

Mortgage companies calculate how much interest you owe on the debt at different times. The vast majority do it daily, a few quarterly or yearly. You need to know how yours works so you can time your extra payments.

With daily interest the timing doesn't especially matter. You benefit the next day, so sooner is always better but not crucial.
With annual interest the timing is crucial. This also applies if the interest is monthly or quarterly. This is because mortgage overpayments will only count to reduce the interest you pay AFTER the calculation is made. Put it in at the wrong time and you'll miss out.

Say the amount you'll be paying in interest is worked out on December 31, then you need to make sure you pay the extra in before Christmas. Leave it until January and you lose the benefit of overpaying. You'll still be charged interest as if you hadn't made the overpayment until next 31 December.

Most mortgages these days are daily interest, but be sure to check.

Does the mortgage have a 'borrow back' facility?

If you're overpaying, 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.

If your lender allows you to do so, then you can effectively use your mortgage as a high-interest savings account. If you leave 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 simply stop paying it when you want. But be careful. Lenders don't let you play hooky from the goodness of their hearts.

Some lenders insist you've overpaid first (so it's the same effect as the borrow-back). If they don't, then you'll pay for it as the interest continues to be added to your loan and you're not clearing anything.

Typically, borrowers taking a 'holiday' arrange to miss one or two payments, and their monthly payments are recalculated to spread the cost of those missed payments the rest of the life of your loan – in other words, your repayments will go up.

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

Always arrange a payment holiday with your lender first. You can't just decide by yourself to take a payment holiday because it's a feature of your mortgage, you'll also need to agree with it with your lender. If you don't, it'll hit your credit file and look like you've missed payments willy-nilly. This will seriously damage your credit score and your remortgage chances in the future.

Offset interest rates and current account mortgages

So far, the focus has been on mortgages that are variations on a simple theme. You borrow a set amount of money, you pay back a certain amount every month, and your debt is the amount you borrowed minus the repayments you've made. So far, so straightforward.

However, for ultimate flexibility, there are mortgages specifically designed to allow you to use them as a place to put your savings. They still come in variable or fixed deals as described above, but with a twist...

Offset mortgages

An offset mortgage keeps your mortgage debt and savings in separate pots with the same bank or building society. But the big difference is your cash savings are used to reduce – or 'offset' – the amount of mortgage interest you're charged. Here's an example:

If you've a mortgage of £150,000 and savings of £15,000, then you only pay interest on the difference of £135,000.
Your rate of interest stays the same every month. But your savings pot acts as an overpayment, wiping out part of the loan that interest is being charged on every month. This will help you clear the mortgage early.
As you're repaying more quickly, it'll cost you less overall. The most important point is the money can be withdrawn whenever you want with no problem (but obviously then it no longer offsets your mortgage debt).

Offsets are a good way for your family to help you cope with your mortgage, if they have savings and you don't, but they don't want to necessarily part with their cash.

Rather than giving you money to reduce your mortgage, they can deposit their savings in an account with your lender and link them to your mortgage. This reduces the capital you owe without losing access to them. All they lose is the interest which, let's face it, isn't much anyway these days.

Use our calculator to compare an offset mortgage to a standard mortgage with separate savings account.

Is offsetting worth it?

Many people get very excited by the idea of offset, but hold your horses. The problem is that offsets are usually at a higher rate than standard mortgages.

Think about it. If you've a £200,000 mortgage, while getting a better rate on £20,000 of savings is nice – you don't want to pay a worse rate on the remaining £180,000 debt. So in the main, unless the offset is really cheap (in other words, it's not much more than a non-offset mortgage), only those who'll be offsetting a substantial amount of savings should bother.

Even then, you could just get a smaller normal mortgage and borrow less or overpay.

Current account mortgages

This type of mortgage is very rare these days. Here, as it says on the tin, your mortgage is combined with your current account, so you've one balance. Here's an example:

If you have £4,000 in your current account and a mortgage of £150,000, then you're effectively £146,000 overdrawn. The debt is smallest just after your salary is paid in, and it then creeps up throughout the month as you spend your salary.
You make a standard payment every month which is designed to clear your mortgage over the term you've chosen. The extra money floating around in your account is like an overpayment, which should mean you pay the loan off much more quickly.
Any extra cash savings can be added to reduce the balance further. Many people liked the idea but didn't like constantly seeing a debt figure in their bank account.

The additional benefit of the current account element is often overstressed. Unless you have huge fluctuations in salaries and big bonuses, it's a tiny saving compared to an offset – and the costs of these mortgages are often much more.

Single or joint mortgages

Applying for a mortgage on your own means the lender can only take one income into account, so unless you're a high earner, this can limit the amount you're able to borrow.

With a joint mortgage on the other hand, a lender can take into account the incomes of everyone hoping to be named on the mortgage (which can increase the chances of acceptance and borrowing the amount of cash you need).

Be mindful that when you take out a joint mortgage – for example, with a partner or spouse – the lender classes you both as 'jointly and severally liable' for the debt. This means the lender can pursue you both, or either of you separately, for the full debt.

For more information about what a lender will consider when deciding how much money to lend you, see our How much can I borrow? guide. This guide also explains how the size of your deposit impacts on the interest rate you can get.

What does 'joint tenants' mean?

Don't get confused between the terms 'joint tenants' and 'joint mortgage' as they're something separate.

Setting joint mortgage aside for now, if you were to buy a property with another person, then you'd need to decide on the tenancy arrangement between you – in other words, how to own the property with the other joint owner.

Joint tenants is the most common form of property ownership between romantic couples. It means you're both assumed to own the property in full. If you were to split up and can't decide how to divide up its value, the courts will decide for you. If one of you were to die, the property would revert in full to the survivor.

The other way is to be 'tenants in common'. Under this, each person owns a specified proportion of the property, say 50/50. Then if you break up or one of you dies, it's clear who owns what. This can also be used if one person's putting down a significantly larger deposit than the other.

For full details about the differences, see our Joint tenants versus tenants in common guide.

Remember though, neither type of ownership stops you being jointly and severally liable for the mortgage debt if you've got a joint mortgage together.
What if I want to buy with a friend?

Some friends or siblings club together to buy a property – normally lenders allow up to four people to get a joint mortgage. Pooled salaries will increase your buying power, but remember you are jointly and severally liable for the mortgage.

You need to consider what would happen if one of you wanted to sell your share or lost your job. The lender won't care if three out of four of you paid your share. It'll want its money and will pursue all of you for the debt. In reality, it's likely to put more effort into chasing the person who is still working than the person who isn't.

Buying with other people isn't something to be taken on lightly. Once you take on a mortgage together you're financially linked – your friend's credit rating will now affect yours and even a partial missed payment will go on all your credit files. Don't do this without sorting a legal contract between you covering all the 'what if' possibilities and what your rights are.

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 is somebody who promises to make your mortgage payments (such as a parent) if you fail to do so. They don't own the property so are not on the title deeds, but they have signed a legal contract with your mortgage lender.

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).

Is the guarantor committed for the full mortgage term?

Your guarantor will be committed until the lender is willing to release them, or, the guarantee may be for an agreed period of time, for example, five years, at which point the mortgage debt will have reduced to a level the lender is comfortable with.

Some guarantor mortgages require the guarantor to place a sum of money in an account that cannot be accessed for a period of time. This gives the lender more confidence that if you don't pay, there'll be an account with money in it waiting.
Can a broker sort a guarantor mortgage for me?

It's definitely worth speaking to a broker if you need to go down this route – not only do you need to be creditworthy enough to get a loan from the lender, but your guarantor will also be assessed to make sure they could make your repayments on top of their own commitments.

Looking for more mortgage help?

We've got lots of other helpful guides:

First-time buyers' guide. Free PDF to get you on that first rung.
Cheap mortgage finding. How to find the top deal for you.
Shared ownership. An option if you're struggling to get onto the property market.
Green mortgages. Could you save with a green mortgage?
Buying a new-build home. Top tips and what to look out for.
Self-employed mortgages. How they work.