The Two Decisions Behind Every Mortgage
Choosing between the types of mortgage available in the UK is usually framed as a hunt for the lowest rate. Two decisions sit underneath it that matter more: how you repay the debt, and what happens to your rate over time. Settle those and most of the remaining choice follows.
This page covers both, with figures showing what the options actually cost, then the types of mortgage built around particular situations.
How You Repay: Capital Repayment or Interest Only
Every mortgage sits in one of two repayment structures.
On a capital repayment mortgage, each monthly payment covers the interest and chips away at the balance. Keep paying to the end of the term and the debt reaches zero. This is what nearly all residential lending in the UK now looks like.
On an interest only mortgage you pay the interest and nothing else. The balance at the end of the term is the same as the balance at the start, and you need a credible plan to clear it.
On £250,000 over 25 years at 5%:
- Capital repayment costs £1,461 a month, and £438,443 across the full term, at which point nothing is owed.
- Interest only costs £1,042 a month, and £312,500 in interest across the term, with the original £250,000 still outstanding.
The £420 monthly difference is the whole appeal of interest only, and the £250,000 still owed at the end is the reason lenders restrict it. Residential interest only now generally requires a substantial deposit, a high income and evidence of a repayment vehicle, whether that is investments, a pension lump sum or the sale of another property. On buy to let it remains standard, because the property itself is usually the exit.
How Your Rate Behaves: Fixed, Tracker and Variable
The second decision is what your rate does once the mortgage starts.
A fixed rate holds for an agreed period, commonly two or five years. The payment does not move whatever happens to the Bank of England base rate. You are buying certainty, and the price of that certainty is that you gain nothing if rates fall.
A tracker mortgage follows the base rate at a set margin above it. If base rate drops, the payment drops the following month. If it rises, the payment rises the same way. Nothing is capped unless the product carries a collar.
A standard variable rate is the lender’s own rate, moved at the lender’s discretion. It is what you land on when a fixed or tracker deal ends, and it is almost always the most expensive place to sit. Rolling onto it is a passive decision that costs real money, which is covered in more detail on what happens when a fixed rate ends.
A discounted variable rate is the standard variable rate less a fixed discount for a set period, so it moves with the lender’s rate rather than the base rate.
At current mid-market pricing, a five year fixed around 5.0% costs £1,461 a month on £250,000 over 25 years, against £1,476 on a tracker at 5.1%. Fifteen pounds separates them at the outset. The question is not which is cheaper today but which direction you expect rates to take, and how much a payment rise would hurt. Current ranges by deposit size are set out on mortgage rates UK.
Offset Mortgages
An offset mortgage links your savings to your mortgage. The savings are not used to repay anything; they simply reduce the balance interest is charged on.
With a £180,000 mortgage and £20,000 held in a linked account, interest is charged on £160,000 rather than the full amount. At 5%, that is £8,000 a year instead of £9,000, so the saving is £1,000 a year, and the money stays accessible.
The saving works out as a tax-free return equal to your mortgage rate, which is why offsets suit higher-rate taxpayers with meaningful cash reserves. Rates on offset products tend to sit slightly above equivalent standard deals, so the maths only works with a reasonable balance sitting there.
Types of Mortgage by Situation
Beyond structure and rate, products are built around who is borrowing and why.
- Residential mortgages cover the home you live in, whether buying or remortgaging.
- First time buyer mortgages are not a separate product so much as a set of features aimed at people without equity from a previous sale: smaller deposits, guarantor arrangements and scheme support.
- Buy to let mortgages fund property let to tenants. Affordability is assessed on rental income rather than salary, with a stress test applied to the rent.
- Remortgages move an existing loan to a new lender, usually to secure a better rate or release equity.
- Product transfers keep you with the current lender on a new rate, with less paperwork but no market comparison.
- Shared ownership mortgages cover the share being purchased from a housing association, with rent paid on the remainder.
- Self employed and contractor mortgages apply the same products, assessed on accounts, tax calculations or day rates rather than payslips.
- Bad credit mortgages sit with lenders that price for adverse history rather than declining it outright.
- Second charge mortgages sit behind the existing loan, letting you borrow against equity without disturbing a first charge you want to keep.
Which Types of Mortgage Suit Which Situation
The combinations that come up most often:
- A first purchase on a tight budget usually points to capital repayment on a fixed rate, because certainty matters more than optimisation when the margin is thin.
- A borrower expecting rates to fall, with room in the budget to absorb a rise, has a case for a tracker.
- A higher-rate taxpayer holding significant cash has a case for an offset that few other borrowers do.
- A landlord will normally be on interest only, because the tax treatment and the eventual sale both point that way.
- Nobody has a case for sitting on a standard variable rate.
Whether the numbers work at all comes before the product choice, which is covered on can I get a mortgage.
Why Work with UK Mortgage Broker
Comparing rates across lenders is straightforward. Working out which structure suits your situation, and which lenders will accept your income, deposit and credit profile, is the part that takes access to the whole market rather than one lender’s range.
UK Mortgage Broker is whole of market, so the recommendation follows the case rather than a panel. Where the right answer is a product transfer with your existing lender, that is what we will tell you.
Frequently Asked Questions
What is the difference between a repayment and an interest only mortgage?
A repayment mortgage clears the balance by the end of the term. An interest only mortgage leaves the full amount outstanding, so a separate plan to repay the capital is required, and lenders apply strict criteria before agreeing to one.
Is a fixed or tracker mortgage better?
Neither is better in the abstract. A fixed rate buys certainty at the cost of any benefit if rates fall. A tracker moves with the base rate in both directions, which suits borrowers with enough headroom to absorb an increase.
How does an offset mortgage save money?
Linked savings reduce the balance interest is charged on. Holding £20,000 against a £180,000 mortgage at 5% means interest is charged on £160,000, saving £1,000 a year, and the savings remain available to withdraw.
What happens when a fixed rate ends?
The mortgage moves onto the lender’s standard variable rate, which is usually considerably more expensive. Arranging a remortgage or product transfer before the fixed period ends avoids the gap.
Can you change mortgage type during the term?
Switching between repayment and interest only, or from variable to fixed, is usually possible but requires the lender’s agreement. An early repayment charge may apply if the current deal is still running.
Which mortgage type is best for a first time buyer?
Most first purchases are capital repayment on a fixed rate, because the payment is predictable while other costs are still unknown. Deposit size drives the rate available more than the product choice does.
Final Thoughts
The rate is the number everyone looks at, and it is rarely where the money is won or lost. Repayment structure decides what you owe at the end. Rate type decides how exposed you are to changes you cannot control. Both are worth deciding deliberately rather than by default.
UK Mortgage Broker is a whole-of-market broker, directly authorised and regulated by the Financial Conduct Authority. Your home may be repossessed if you do not keep up repayments on your mortgage. Figures shown are illustrative and are not a quotation.
Call: 01628 969 500
Email: info@uk-mortgagebroker.co.uk
Related Pages
- Fixed vs Tracker Mortgages 2026 – Detailed comparison of the two most common rate structures and which suits your circumstances.
- Remortgaging Early – Timing your next mortgage switch for maximum benefit, and when it backfires.
- How Much Can I Borrow – Income multiples and what lenders will lend against them.
- Best Mortgage Strategy – Working out which combination of structure, rate and timing fits your circumstances.
- Holiday Home Mortgages – How deposits, rates and lending criteria differ on a second or holiday property.