What are the five most common (and least understood) types of mortgage?

For most people, buying a new home is the biggest financial commitment they’ll ever make. That’s why it’s vital to understand the various mortgage types on the market. 

As property prices have fluctuated and mortgage rates increased in 2023, Barratt Developments have analysed Google keyword data to reveal which types of mortgages are the most searched for in the UK, covering the pros and cons of each.  

They also surveyed 500 UK homeowners to assess mortgage understanding, revealing which types are least familiar to us. In this article, they explain five different types of mortgages, including both the most common, and the least understood:

  1. Fixed-rate mortgages
  2. First time buyer mortgages
  3. Offset mortgages
  4. Tracker mortgages
  5. Lifetime mortgages

1) What is a fixed-rate mortgage?

With a fixed-rate mortgage, your repayments will be the same for a set period – typically two to five or sometimes even ten years. This gives you the certainty of knowing what your repayments will be regardless of market interest rates. 

Fixed-rate mortgages are among the most popular mortgage types, accumulating the most average UK monthly searches. It’s perhaps surprising that 32% of homeowners are unfamiliar with this mortgage.  

The pros of a fixed-rate mortgage:

  • Peace of mind that your monthly payments will stay the same. 
  • Ideal for those on a tight budget looking for stability. 

The cons of a fixed-rate mortgage:

  • If interest rates drop, you won’t benefit from lower repayments. 
  • Choosing to switch from certain long-term fixed-rate mortgages early can lead to significant exit penalties.  

When a fixed-rate mortgage ends, you will be switched onto your lender’s standard variable rate (SVR), or you can remortgage. When you remortgage you will usually be offered a new rate from your existing called a Product Transfer. If you want to switch before the deal ends, you’ll usually pay an early repayment charge. 

2) What is a first-time buyer mortgage?

First-time buyer mortgages are loans designed for individuals purchasing their first home. It is often tailored to accommodate the unique financial circumstances and needs of first-time buyers

Various mortgage products are specifically targeted at first-time buyers, including low-deposit mortgages that offer first-time buyers the potential to secure a property with a lower down payment, and fixed-rate mortgages that offer a stable interest rate for a predetermined period. 

As a first-time buyer, this is likely the first time you will have encountered conversations about mortgages best suited to you. Yet, 40% of homeowners are unfamiliar with what this mortgage entails. 

The pros of a first-time buyer mortgage:

  • Typically offers lower deposit requirements compared to other mortgage types. 
  • Exposure to government schemes and financial help, including lifetime  Individual Savings Accounts (ISAs) and shared ownership. 

The cons of a first-time buyer mortgage: 

  • First-time buyers may be offered higher interest rates compared to those with a larger down payment or a more established credit history. 
  • Lenders may impose strict eligibility criteria for first-time buyers, making it challenging for those with limited credit history or lower income. 

2) What is an offset mortgage?

With offset mortgages, you keep your mortgage debt and savings with the same bank or building society. Your savings are then used to reduce – or ‘offset’ – the amount of mortgage interest you’re charged. 

Offset mortgages can potentially help reduce the interest you pay. However, 89% of homeowners are unaware of this mortgage type. 

The pros of an offset mortgage: 

  • It can help reduce the amount of interest you pay on a mortgage.
  • It gives you peace of mind to know your savings are working to reduce your mortgage interest. 

The cons of an offset mortgage:  

  • Offset mortgages can be more complex to understand and manage.
  • Payments on the mortgage may increase if the borrower makes a withdrawal from their offset savings.

4) What’s a tracker mortgage?

A tracker mortgage provides an interest rate that may fluctuate, potentially decreasing or increasing, typically staying below the rate of a standard variable rate (SVR) mortgage. Two in three homeowners are unaware of this mortgage loan. 

The pros of a tracker mortgage:    

  • If the base rate falls, your mortgage payment costs will fall.
  • Certain tracker mortgages have a cap, meaning the interest rate won’t go beyond a set limit, even if the base rate rises.

The cons of a tracker mortgage:   

  • If the base rate increases, your mortgage payments will increase.
  • You won’t know how much your repayments will be throughout the entire deal period.
  • You might have to pay an early repayment charge if you want to switch before the deal ends.

5) What’s a lifetime mortgage?

A lifetime mortgage is a product designed for mature homeowners that allows them to convert a portion of their home equity into tax-free cash, without the need to sell their home, give up ownership, or make monthly mortgage payments.  

There are almost seven million homes in England headed by someone aged 65 or over. However, 71% of UK homeowners are unaware of lifetime mortgages  

The pros of a lifetime mortgage:  

  • A lifetime mortgage provides a tax-free income source, allowing retirees to enhance their cash flow during retirement years.
  • Borrowers are not required to make monthly mortgage payments as long as they continue to live in the home.

The cons of a lifetime mortgage:    

  • Interest on a lifetime mortgage accumulates over time, increasing the loan balance and reducing the homeowner’s equity and reducing the amount of inheritance for family.
  • Obtaining a lifetime mortgage could potentially disqualify you from means tested  benefits that you would otherwise be eligible for.

 Choose the right mortgage for you

Adrian MacDiarmid, Head of Mortgages at Barratt Developments, advises that choosing the right type of mortgage is important, as it can help save you a lot of money. While a fixed-rate mortgage is the most popular option overall, there are a lot of new products available now tailored to specific buyers.   

A green mortgage, for example, could be a great choice if you’re purchasing an energy-efficient new build home. The many options available mean that it is always a good idea to take advice from a suitably qualified and regulated mortgage adviser who will be able to help you find the product best suited to your own individual circumstances.

Read more about mortgages

You can read more advice on mortgages in these articles: