What is Mortgage and Types of Mortgage (UK)

Buying a home in the UK is one of the biggest financial commitments most people will ever make, and choosing the right mortgage is key to making that commitment manageable. A mortgage is not just a loan; it is a long-term agreement that affects your monthly budget, lifestyle, and financial stability. Many first-time buyers, landlords, and even seasoned investors feel unsure about which type of mortgage suits their situation best.

With interest rates shifting and lenders introducing new products, it is essential to know exactly how mortgages work and what options are available in the UK market. We help buyers and investors cut through the noise by explaining mortgage types in simple terms, making it easier to match the right product to personal goals. In this content we will give you a clear breakdown of mortgages, their types, and what to expect in 2025, ensuring you make an informed and confident decision.

What Is a Mortgage and How Does It Work?

A mortgage is a type of secured loan that allows you to buy property without paying the full amount upfront. Instead, you provide a deposit, usually 5% to 25% of the property price, and a lender covers the rest. The loan is then repaid over a fixed term, typically 20 to 35 years, through monthly instalments. These instalments include two parts: the capital (the amount borrowed) and the interest (the lender’s charge for borrowing).

In the UK, there are two main categories of mortgages: residential mortgages (for people buying a home to live in) and buy-to-let mortgages (for landlords purchasing property to rent out). Lenders decide how much you can borrow based on your income, credit history, and deposit size. The larger your deposit, the more competitive the interest rate you’re likely to secure.

Key features of mortgages in the UK include:

• Loan-to-Value (LTV): The percentage of the property price borrowed.

• Interest rate type: Fixed, variable, tracker, or capped.

• Term length: Shorter terms mean higher monthly repayments but lower total interest.

By understanding these basics, you can begin comparing products and identifying the type of mortgage that aligns with your financial position.

Main Types of Mortgages in the UK

Repayment vs Interest-Only Mortgages

Repayment mortgages are the most common choice in the UK. With this structure, every monthly payment reduces both the capital and the interest, ensuring that by the end of the term, the loan is fully cleared. This approach provides security, as homeowners know they will eventually own the property outright.

Interest-only mortgages, on the other hand, involve paying only the interest each month, leaving the capital untouched. While this keeps monthly payments low, the original loan must be repaid in full at the end of the term, often through savings, investments, or property sales. These are popular with investors who plan to profit from rental income or future property value increases. However, for residential buyers, lenders apply stricter criteria due to the risks involved.

Feature	Repayment Mortgage	Interest-Only Mortgage
Monthly payments	Higher	Lower
Capital repayment	Yes	No (capital due at end)
Ownership at the end of the term	Property owned outright	Property still owes capital unless repaid
Best for	Homebuyers wanting security	Investors with exit strategies

Fixed-Rate Mortgages

A fixed-rate mortgage offers stability by locking in an interest rate for a set period, usually 2, 5, or 10 years. During this time, monthly repayments remain unchanged, protecting you from market fluctuations. This makes budgeting easier, especially for first-time buyers who need certainty in their finances.

The drawback is that fixed-rate deals can come with higher rates compared to variable mortgages, and early repayment charges apply if you switch deals before the fixed period ends. Still, for buyers seeking predictable costs, fixed-rate mortgages remain one of the most popular options in the UK.

Variable-Rate Mortgages

Unlike fixed-rate deals, variable mortgages change in line with interest rates set by either the Bank of England or the lender. Monthly payments can rise or fall, making them riskier but sometimes more affordable initially.

Tracker Mortgages

These follow the Bank of England base rate plus a set percentage. For example, if the base rate is 5% and your tracker adds 1%, your rate will be 6%. They are transparent but leave borrowers exposed to rate hikes.

Standard Variable Rate (SVR) Mortgages

This is the default rate you move onto when an initial deal ends. SVRs are usually higher than other products and can change at the lender’s discretion. Most borrowers remortgage before reaching SVR.

Discount Rate Mortgages

These offer a temporary discount on the lender’s SVR, usually lasting 2–3 years. Payments start low but increase if the SVR rises, so they require careful budgeting.

Capped Rate Mortgages

Capped deals combine the features of variable mortgages with protection. While payments can rise or fall, they will never exceed a set cap. Although less common today, they remain attractive for buyers wanting flexibility with a safety net.

Offset Mortgages

Offset mortgages link your mortgage account to your savings account. The balance in your savings is deducted from your outstanding mortgage when calculating interest. For example, if you have a £200,000 mortgage and £20,000 in savings, you only pay interest on £180,000.

This setup reduces interest costs and can shorten your mortgage term without requiring you to physically use your savings. Offset mortgages are especially beneficial for higher earners and those with significant savings, though rates can be higher than standard deals.

Specialist Mortgage Types in the UK

Buy-to-Let Mortgages

Buy-to-let mortgages are designed for landlords purchasing property to rent out rather than live in. Unlike residential mortgages, lenders see these as higher risk because repayments rely on rental income. For this reason, deposits are typically larger, usually 25% or more, and interest rates are slightly higher than standard residential products. Affordability is judged not by your personal salary alone but by the property’s rental yield, often requiring rental income to cover at least 125–145% of the mortgage payment.

Many investors use interest-only buy-to-let mortgages to maximise monthly cash flow, though repayment mortgages are also available. At Property Store, we often see new landlords underestimate the stricter criteria, which include credit score checks, property condition standards, and landlord experience requirements. For long-term investors, buy-to-let remains a strong option, but it demands careful planning and realistic projections of rental demand.

Let-to-Buy Mortgages

A let-to-buy mortgage is useful for homeowners who want to rent out their existing property while buying a new one to live in. For example, someone relocating for work might prefer to keep their old property as a rental investment rather than sell it. In this case, their existing residential mortgage is switched to a let-to-buy agreement, while a new residential mortgage is taken on the new home. Lenders require homeowners to show that the rental income from the first property is sufficient to cover mortgage payments.

The main advantage is the ability to step into property investment without selling your original home, but it comes with higher deposit requirements and stricter checks. It also increases financial responsibility, as you’re managing two mortgages at once. Let-to-buy works best for those with stable income and a clear plan for managing tenants and property maintenance.

Guarantor and Family Mortgages

Guarantor mortgages, sometimes called family mortgages, involve a parent or close relative supporting a borrower by guaranteeing the loan. This type of mortgage is often used by first-time buyers with limited deposits or weaker credit histories. In practice, the guarantor pledges their savings or property as security, giving the lender confidence to approve the mortgage. While this can help young buyers step onto the property ladder sooner, it carries risks for the guarantor.

If repayments are missed, the guarantor’s savings or property could be at risk. Some lenders now offer family deposit mortgages, where parents place money into a linked savings account rather than directly guaranteeing repayments. This reduces risk slightly but still requires trust and commitment. For many families, guarantor mortgages are a stepping stone to homeownership, but all parties should seek independent legal advice before proceeding.

Joint Mortgages

A joint mortgage allows two or more people to buy a property together, commonly couples, family members, or even friends. All applicants’ incomes are considered in affordability checks, which increases borrowing power compared to applying alone. There are two main ownership structures: joint tenancy, where all parties equally share ownership, and tenants-in-common, where ownership shares can be divided unequally.

The choice depends on financial arrangements and long-term plans. While joint mortgages can make buying property more affordable, they also require trust and clear agreements. If one party defaults, all borrowers are responsible for the full debt. At Property Store, we recommend that joint applicants discuss legal protections, such as a deed of trust, to prevent disputes later. Joint mortgages can open doors to property ownership, but they need careful planning to avoid financial strain or disagreements.

Help to Buy and Shared Ownership Mortgages

Government-backed schemes such as Help to Buy (which closed to new applications in 2023 but still affects existing homeowners) and Shared Ownership remain important for first-time buyers. Shared Ownership allows buyers to purchase a percentage of a property (usually 25–75%) while paying rent on the remainder. Over time, they can increase their share through a process called “staircasing.” Mortgages for these schemes are structured differently, with lenders assessing affordability based on part-ownership.

While they reduce deposit requirements, buyers must account for rent and service charges on top of mortgage payments. For many, Shared Ownership offers a realistic entry point into the property market, especially in high-value areas. However, restrictions on resale and additional costs should be carefully reviewed before committing. These schemes continue to support buyers struggling with rising property prices and deposit requirements.

Green Mortgages

Green mortgages are a newer addition to the UK market, designed to reward buyers and homeowners for purchasing energy-efficient properties. Lenders may offer lower interest rates or cashback incentives if the property has a high Energy Performance Certificate (EPC) rating, usually A or B. For existing homes, green mortgages may provide funds for eco-friendly upgrades such as insulation, solar panels, or efficient heating systems.

With the UK government’s ongoing push toward reducing carbon emissions, these products are becoming increasingly common. At Property Store, we see them as a smart option for eco-conscious buyers or landlords who want to future-proof their investments while lowering running costs. Although eligibility is limited to certain properties, green mortgages highlight how lenders are adapting to meet sustainability goals.

How to Choose the Right Mortgage

Choosing the right mortgage depends on a combination of personal circumstances and market conditions. Key factors include:

• Deposit size: Larger deposits usually secure lower interest rates.

• Credit score: A stronger score improves approval chances and deal options.

• Income stability: Lenders prefer applicants with steady employment and reliable income.

• Loan-to-Value ratio (LTV): Higher deposits reduce borrowing risk and cost.

When comparing deals, borrowers should look beyond headline rates. The Annual Percentage Rate of Charge (APRC) includes interest and fees, giving a clearer picture of long-term costs. Other factors such as flexibility, overpayment options, and early repayment charges also matter.

Borrowers face a choice between applying directly to banks or using a mortgage broker. While going direct can be quicker, brokers often access exclusive deals and provide expert guidance. 

Mortgage Costs Beyond Interest Rates

Many buyers focus solely on interest rates, but mortgages carry several additional costs that can significantly impact affordability. Common charges include:

• Arrangement fees: Often £500–£2,000, added upfront or to the loan.

• Valuation fees: Lenders assess property value before approval.

• Legal fees: Solicitor or conveyancing costs for property purchase.

• Early Repayment Charges (ERCs): Applied if you switch or repay early during a fixed term.

To understand the real cost of a mortgage, buyers should calculate the total cost over the full term, including fees and interest. For example, a mortgage with a slightly higher rate but lower fees may be cheaper overall than one with a lower headline rate but high upfront charges. Transparent comparison ensures borrowers choose deals that genuinely suit their financial position rather than simply chasing low rates.

Government Support and First-Time Buyer Schemes

The UK government continues to support first-time buyers with schemes designed to reduce entry barriers. Key initiatives include:

• Lifetime ISA (LISA): Savers aged 18–39 can deposit up to £4,000 annually, with the government adding a 25% bonus, to be used for a first home or retirement.

• First Homes Scheme: Properties offered at a 30–50% discount for local first-time buyers and key workers.

• Shared Ownership: Allows gradual property ownership by purchasing shares.

• Stamp Duty Relief: First-time buyers purchasing homes under £425,000 pay no Stamp Duty Land Tax (SDLT).

These schemes can reduce upfront costs and open doors to homeownership sooner. At Property Store, we recommend reviewing eligibility criteria carefully and considering long-term implications, such as restrictions on resale. While government support is valuable, buyers should balance incentives with overall affordability and future flexibility.

Suggestions: Finding the Right Mortgage

Mortgages remain one of the biggest financial commitments most people will make, and with the UK property market constantly evolving, choosing wisely is essential. From repayment and interest-only options to specialist products like buy-to-let, let-to-buy, or green mortgages, the choice is wide but should always align with personal needs. At Property Store, we encourage buyers to focus less on chasing the “cheapest deal” and more on selecting a mortgage that matches their deposit, income stability, and long-term plans.

Success in property ownership or investment comes from preparation. Comparing lenders, understanding true costs beyond interest rates, and making use of government support schemes can make a huge difference. Equally, seeking professional advice from brokers, tax experts, and solicitors ensures you avoid costly mistakes.

The mortgage market in 2025 rewards those who plan, review their options regularly, and adapt to changing financial conditions. With patience and informed choices, buyers can secure not just a mortgage, but the right foundation for long-term financial security.