Different Types of Mortgages Explained

Ask most people what type of mortgage they have and you get one word back. Fixed. It is a fair answer to the wrong question, because “type” is doing two jobs at once. There is how you pay for the loan, and there is what the lender thinks you are buying. Get the first wrong and you overpay for a couple of years. Get the second wrong and you get declined, usually after six weeks of waiting and a valuation fee you will not see again.

The different types of mortgages available in the UK go well past the handful of products on a high street comparison table. There are mortgages built for landlords, for limited companies, for shops with a flat above, for houses that do not exist yet, and for buyers who have 28 days to complete or lose their deposit.

Here is the whole picture, sorted by the two questions that actually decide what you need.

The Two Questions Behind Every Mortgage

Keep these apart and the market gets a lot simpler.

The first question is how the interest behaves and how the debt gets cleared. Fixed, tracker, discount, offset, repayment, interest only. This is the part most people mean by “mortgage type”, and it is the part every comparison site is built around.

The second is what you are buying and why. A home you live in, a flat you let, a unit you trade from, a plot you are building on. This decides which lenders will look at your case at all.

Answer the second one first. There is very little point comparing headline rates on a product you were never eligible for.

Mortgage Types by How You Pay the Interest

Fixed rate mortgages

The rate is locked for a set period, usually two, three, five or ten years. Your payment does not move, whatever the Bank of England does. You buy certainty, and you pay a small premium for it.

The catch sits at both ends. Leave early and you will normally face an early repayment charge, often a percentage of the balance that steps down each year. And when the deal ends you drop onto the lender’s standard variable rate, which is where a lot of people quietly lose money for months before they notice.

Tracker mortgages

A tracker follows the Bank of England base rate plus a fixed margin. Base rate moves, your payment moves, usually the following month. Some come with a floor, so the rate stops falling at a set point even if base rate keeps going.

Trackers suit people who can absorb a rise and who expect rates to come down. They also tend to carry lighter exit penalties than fixes, which matters if you are planning to sell or refinance sooner than the deal term.

Discount and standard variable rate

A discount mortgage takes a set amount off the lender’s own standard variable rate. That sounds like a tracker, but it is not. The lender sets the SVR and the lender can move it, so a discount can rise even when the base rate has not budged.

The standard variable rate itself is the default you land on when a deal ends. It is rarely competitive. If you are on one now, that is the single quickest saving available to you.

Offset mortgages

An offset links your savings to your mortgage balance. Keep £30,000 in the linked account against a £250,000 mortgage and you are charged interest on £220,000. You earn no interest on the savings, but you pay no tax on the benefit either, which is why offsets tend to appeal to higher rate taxpayers and to people whose income arrives in lumps rather than monthly.

They also keep your money accessible, which a lump sum overpayment does not.

Repayment or interest only

Separate from all of the above is how the capital gets cleared. A repayment mortgage chips away at the balance every month, so you own the property outright at the end. Interest only keeps the monthly cost low and leaves the full balance sitting there on day one of the final month.

Interest only is not reckless, but it does need a credible plan behind it: a sale, a pension lump sum, an investment, a refinance. Landlords use it constantly, because the rent covers the interest and the capital growth does the rest. Residential lenders will want to see the repayment strategy in writing.

Mortgage Types by What You Are Buying

This is where the market splits properly, and where the high street stops being useful.

Residential mortgages

A loan on the home you live in. Assessed on your income, your credit file and your outgoings, and regulated by the FCA. Standardised, largely a tick box exercise, and fine when your circumstances are tidy.

If you are self employed with two years of accounts, on contract, or carrying past credit issues, the tick boxes start working against you. That is usually a case for a specialist lender rather than a smaller loan.

Buy-to-let mortgages

Assessed on the rent, not just on you. Lenders run a rental stress test, checking that the rent covers the mortgage payment by a margin, commonly 125% to 145% at a notional rate higher than the one you are paying. That test, rather than your salary, is what decides how much you can borrow.

Most buy-to-let is unregulated, which means terms are set deal by deal. Our buy-to-let mortgage page goes into the structures in more detail.

Limited company buy-to-let

Plenty of landlords now buy through a limited company, usually an SPV set up for the purpose, because of how mortgage interest is treated for personal tax. Rates are typically a little higher than personal buy-to-let and the lender panel is narrower, but the tax position often outweighs the difference for higher rate taxpayers with several properties.

It is worth taking tax advice before you decide, because moving a property you already own into a company is a sale, with everything that comes with it.

HMOs and multi-unit blocks

A house in multiple occupation, or a block of self contained flats on one title, will not fit a standard buy-to-let product. Yields are higher, so is the management, and licensing rules vary between councils. Some lenders will value on a bricks and mortar basis, others on the investment value of the income, and the difference between those two valuations can change your loan by tens of thousands.

Holiday let mortgages

Short term letting income is seasonal, so lenders assess it on low, mid and high season averages rather than a single figure. A far smaller pool of lenders play here, and most want to see either experience or a professional letting projection.

Commercial mortgages

Secured on property used for business, either premises your company trades from or an investment let to a business tenant. Deposits are bigger, usually 25% to 35%, and the lender is underwriting a business rather than a salary. Most commercial lending is unregulated, so terms are negotiated case by case. There is more on how these are assessed on our commercial mortgage page.

Semi-commercial and mixed use

The shop with a flat above it, or the pub with accommodation. Part business, part residential, and awkward enough that plenty of lenders decline it on principle. The ones who like mixed use will look at the income split between the two parts and how easily the whole thing could be sold. Placed with the right lender it is a straightforward case. Placed with the wrong one it is six wasted weeks.

Self-build mortgages

Funds released in stages as the build progresses, either in arrears once each stage is signed off, or in advance so you can pay for materials before the work is done. Advance stage payments cost a little more and take a lot of pressure off your cash flow. Very different from a standard mortgage, and a specialist product in its own right.

Short-Term and Specialist Finance

These rarely appear in a guide to different types of mortgages, which is exactly why so many people miss them. They are often the answer when a standard mortgage cannot move fast enough, or cannot lend on the property at all.

Bridging loans

Short term finance secured on property, measured in months rather than years. Interest is usually rolled up rather than paid monthly, and the lender’s main question is not your income but your exit: how the loan gets repaid, and when.

Chain breaks, unmortgageable properties, refurbishment before a refinance, buying at speed. If a property has no kitchen or bathroom, a residential lender will not touch it, but a bridge will, and you refinance onto a normal mortgage once the work is done. Our bridging finance page covers the costs properly.

Auction finance

A bridge with a deadline attached. The hammer falls, you exchange on the day, and completion is typically 28 days later. No standard mortgage process reliably moves at that pace. Auction finance is arranged in principle before you bid, so you go into the room knowing your ceiling.

Development finance

For ground up builds, conversions and heavy refurbishment. The lender funds the land purchase and then releases build costs in drawdowns as the scheme progresses, sizing the loan against the gross development value. You are borrowing against what the finished scheme will be worth, not what the site is worth today. More on our development finance page.

Second charge mortgages

A second loan secured on a property you have already mortgaged, sitting behind the first lender. The point is that your first mortgage stays exactly where it is. If you are sitting on a cheap fixed rate, or facing a heavy early repayment charge, raising money behind it is often cheaper than remortgaging the whole balance onto a new rate.

Inheritance and executor loans

An advance against an estate that has not yet been realised. Probate can take the better part of a year, and beneficiaries often need funds sooner, whether to settle liabilities or to stop a property purchase falling through. Up to 50% of a future inheritance can be raised within days. See our inheritance and executor loans page.

Which Type of Mortgage Is Right for You

Work through it in this order and you will land in the right place more often than not.

Start with the property and the purpose, because that sets your lender pool. Then the timescale, since anything under three months is bridging territory rather than mortgage territory. Then your exit, particularly on short term finance, because a lender will not proceed without a credible one. Then the ownership structure, personal or limited company, which is much cheaper to get right at the start than to change later. Rate type comes last, once you know which lenders will actually take the case.

Three mistakes come up again and again. Chasing the lowest headline rate without adding up the arrangement fee, which on a smaller loan can wipe out the saving entirely. Buying in a personal name when a company would have suited better, then discovering the transfer costs. And pushing an unusual case through a high street application, getting declined, and picking up a credit search for the trouble.

Worth knowing too: commercial mortgages, and some buy-to-let and bridging loans, are not regulated by the FCA. That is normal for this part of the market, and it means terms are negotiated rather than pulled off a shelf, so how well your case is packaged genuinely changes what you are offered.

The Clever Way to Choose a Mortgage

The right mortgage is rarely the one with the loudest rate. It is the one from a lender who understands what you are buying, priced for a case that has been put in front of them properly.

That is the part we do. Tell us what you are buying, how you are funding it and when you need to complete, and we will come back within 24 business hours with a straight answer on where you stand and which route makes sense. A standard residential purchase, a growing portfolio, a mixed use building or a site with planning and a tight deadline, send it over and do the Clever thing.

Your property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.