Mortgage Types Explained UK: Repayment vs Interest-Only, Fixed vs Tracker

Choosing the wrong mortgage type costs money. A fixed rate that locks you in when rates fall, or an interest-only deal on a property you never plan to sell — these are expensive mistakes. This guide explains every main mortgage type in plain English, with real figures and a comparison table.

Repayment vs Interest-Only

This is the most fundamental mortgage choice.

Repayment Mortgage

Every monthly payment covers both interest and a portion of the capital (the amount borrowed). Over the term, the balance reduces to zero. At the end, you own the property outright.

This is how the vast majority of UK residential mortgages work, and what most lenders require.

Illustration: £200,000 repayment mortgage at 4.5% over 25 years

Year	Approximate balance remaining	Monthly payment (approx.)
0	£200,000	£1,111
5	£176,000	£1,111
10	£148,000	£1,111
15	£115,000	£1,111
20	£74,000	£1,111
25	£0	—

Total interest paid over 25 years: approximately £133,000

Interest-Only Mortgage

You pay only the interest each month. The capital balance never reduces. At the end of the term, you owe the full original loan amount.

Same £200,000 at 4.5% interest-only over 25 years:

Monthly payment: approximately £750/month (vs £1,111 on repayment)
Balance at end of term: £200,000 — you must repay this in full
Total interest paid: approximately £225,000

Interest-only sounds cheaper monthly, but costs more than £90,000 more in total interest and requires a credible repayment vehicle (typically the sale of the property, an investment ISA, or a pension).

Lender restrictions: Most residential lenders restrict interest-only mortgages to a maximum 50% loan-to-value (LTV) and require evidence of a credible repayment strategy. Some lenders have withdrawn interest-only from their residential range entirely. Interest-only remains common in buy-to-let.

Source: FCA — Mortgages and home finance: conduct of business sourcebook (MCOB)

Fixed-Rate Mortgage

Your interest rate is locked for an initial term — typically 2, 3, 5, or 10 years. The monthly payment does not change during the fixed period, regardless of what happens to the Bank of England base rate.

How it works:

You agree a fixed rate at the start (e.g. 4.2% for 5 years)
Your payments are predictable throughout the fixed term
At the end of the fixed period, you revert to the lender's Standard Variable Rate (SVR) unless you remortgage

Early Repayment Charges (ERCs): If you repay early, overpay beyond the allowed amount, or remortgage during the fixed term, you typically pay an ERC. Common structure: 5% of the outstanding balance in year 1, reducing to 1% by year 5 of a 5-year fix. Read the terms carefully before fixing for 10 years.

Why choose fixed rate:

You want payment certainty — especially important for first-time buyers budgeting tightly
You believe rates will rise (or hold) during the fixed period
You plan to stay in the property for the duration of the fixed term

Tracker Mortgage

A tracker mortgage charges a rate equal to the Bank of England base rate plus a set margin (e.g. base rate + 1.5%). If the base rate moves, your rate — and payment — moves with it.

As of 2025, the Bank of England base rate is set by the Monetary Policy Committee and reviewed roughly eight times per year. Bank of England base rate

Example: If the base rate is 4.75% and your tracker is base + 1.25%, you pay 6.0%. If the base rate falls to 4.0%, you automatically pay 5.25% the following month.

Most trackers have no ERC. This makes them attractive if you plan to sell, remortgage, or make a large overpayment within the near term.

When trackers make sense:

You expect rates to fall (you benefit immediately, without remortgaging)
You plan to sell or remortgage within 2 years and want flexibility
You can absorb payment volatility if rates rise

Discount Mortgage

A discount mortgage charges a rate set at a fixed percentage below the lender's Standard Variable Rate (SVR) — for example, SVR minus 2%. Unlike a tracker, the reference point is the lender's own SVR, not the Bank of England base rate.

The problem: lenders can move their SVR independently of the base rate, and the discount is not as predictable as a tracker. Two mortgage products could both be "2% off SVR" but behave differently if the lenders move their SVRs at different times.

Discount mortgages are now less common than trackers, which offer more transparent rate-setting.

Standard Variable Rate (SVR)

The SVR is the lender's default interest rate, applied when no introductory deal is active. Every lender has its own SVR, typically 1–3% above the Bank of England base rate — though there is no formula. SVRs are typically 6–8% or higher.

You should almost never stay on the SVR. When your fixed or tracker deal ends, move immediately. Staying on SVR for a £200,000 mortgage can cost £200–£400/month more than a competitive remortgage deal.

The FCA's Mortgage Market Review requires lenders to assess affordability at reversion to SVR in some cases.

Offset Mortgage

An offset mortgage links your mortgage to one or more savings accounts. The balance in your savings account is offset against your mortgage balance for the purposes of calculating interest.

Example:

Mortgage balance: £200,000
Savings linked: £30,000
Interest charged on: £170,000 (not £200,000)

You do not earn interest on your savings — instead, you save interest on the mortgage at the mortgage rate, which is typically higher than savings rates.

Tax efficiency for higher earners: Interest earned on savings is taxable. Interest saved on a mortgage is not. For a higher-rate taxpayer, an offset mortgage can be more tax-efficient than holding savings separately.

Offset mortgages typically carry a slightly higher rate than standard products. They make most sense for borrowers who maintain large liquid savings balances.

Buy-to-Let Mortgage

Buy-to-let (BTL) mortgages are a separate product category. Key differences from residential mortgages:

Minimum deposit: Typically 25% (75% LTV maximum); some lenders offer 80% LTV but at higher rates
Interest-only: Widely available and commonly used by landlords
Rental stress test: Lenders assess affordability based on the rental income, not just personal income. Rent typically must cover 125–145% of the monthly mortgage payment at an assessed interest rate (often 5.5–6.0%, regardless of the actual rate). This is known as the Interest Cover Ratio (ICR).
Not regulated by the FCA for most BTL applications (FCA regulation applies only to "consumer buy-to-let" — where the borrower or a close family member previously lived in the property)
Additional Dwelling Supplement on SDLT applies (3% surcharge)

Source: FCA — Buy-to-let mortgages

Mortgage Type Comparison Table

Mortgage type	Rate certainty	Payment flexibility	ERC risk	Best for
Repayment (fixed)	High	Low	Yes	First-time buyers, long-term owners wanting certainty
Repayment (tracker)	Low	High (usually no ERC)	Usually no	Buyers expecting rate falls, short-term holds
Interest-only	Varies	Medium	Depends on type	Investors, HNW borrowers with repayment strategy
Discount rate	Medium	Medium	Usually yes	Short-term cost savings, rate-savvy borrowers
SVR	Low	High (no ERC)	None	Nobody — avoid if any remortgage option exists
Offset	Medium	High	Depends on deal	Higher earners with large savings balances
Buy-to-let	Varies	Varies	Varies	Landlords and property investors

Which Should You Choose?

The right mortgage type depends on your circumstances:

Buying your first home and budgeting tightly? A 2 or 5-year fixed rate gives you predictable payments while you adjust to ownership costs.
Planning to move or remortgage within 2 years? A tracker or short fix with no ERC avoids hefty early repayment charges.
Holding a large cash reserve? Explore offset mortgages — the tax efficiency can outperform savings accounts for higher-rate taxpayers.
Buying a rental property? Buy-to-let with interest-only is standard. Ensure the ICR stress test works at current rental yields.

Always take advice from a whole-of-market mortgage broker authorised by the FCA before choosing. A broker has access to deals not available directly from lenders and can model different scenarios for your specific situation. MoneySavingExpert's mortgage guides are a useful starting point.

Key Sources

This article is for information only and does not constitute financial advice. Always speak to an FCA-authorised mortgage adviser before making a decision.