Types of mortgages available

Choosing the right mortgage is one of the most important decisions you’ll make when buying a home, especially for the first time. A wide range of mortgage types are available in Scotland, each with its own advantages depending on your financial goals, lifestyle, and appetite for risk. Understanding the key differences between them will help you make an informed decision that works for both the short term and the years ahead.

Fixed-Rate Mortgage

A fixed-rate mortgage offers peace of mind and predictability. With this type of mortgage, your interest rate is locked in for a specific period, commonly two, five or even ten years, regardless of what happens in the wider economy. This means your monthly repayments will stay exactly the same for the duration of the fixed term, making it easier to budget with confidence.

Fixed-rate mortgages are a popular choice for first-time buyers who want stability and don’t want to worry about interest rates rising unexpectedly. They’re especially appealing if you’re working within a tight monthly budget or are new to home ownership and want consistency as you get settled. However, fixed rates can sometimes be slightly higher than introductory variable rates, and there may be fees if you want to exit or switch deals early.

Variable-Rate Mortgage

A variable-rate mortgage comes with more flexibility but also more uncertainty. The interest rate on this type of mortgage can go up or down over time, depending on your lender’s Standard Variable Rate (SVR). Because SVRs are set by the lender, they don’t always track directly with the Bank of England’s base rate, and changes can happen at any time.

The main attraction of a variable-rate mortgage is that it can start off cheaper than a fixed-rate option, especially if interest rates are low when you apply. However, your monthly payments could increase if your lender raises their SVR. This type of mortgage may suit buyers who have room in their budget for fluctuation and are comfortable managing potential changes in their outgoings. It’s important to think carefully about how much risk you’re willing to take.

Tracker Mortgage

Tracker mortgages are similar to variable-rate mortgages, but with one key difference: instead of following the lender’s internal rate, they are directly tied to the Bank of England’s base rate. The interest rate you pay will be the base rate plus a set margin, such as 1 or 2 percent. If the base rate goes up, your mortgage rate increases; if it drops, you benefit from lower monthly payments.

This transparency appeals to many buyers because you can clearly see how your rate is calculated. However, because tracker mortgages are influenced by economic policy, they can be unpredictable. If interest rates rise significantly, so will your repayments. Tracker mortgages may be a good option if you believe interest rates will remain stable or fall in the near future. They tend to offer lower rates initially than fixed mortgages, but with greater exposure to market shifts.

Offset Mortgage

An offset mortgage links your savings to your mortgage balance, which can help reduce the amount of interest you pay. Rather than earning interest on your savings in a separate account, your savings are held in an account that offsets the value of your outstanding mortgage. You only pay interest on the difference between the two amounts.

For example, if your mortgage is £150,000 and you have £20,000 in an offset savings account, you would only be charged interest on £130,000. This setup can significantly reduce the total cost of your mortgage over time, especially if you have sizeable savings that you don’t need immediate access to.

Offset mortgages are particularly useful for financially disciplined buyers who prefer flexibility over fixed-term returns. While the interest rates on offset products can be slightly higher than traditional mortgage rates, the savings in interest and the ability to reduce the term of your loan can make them worthwhile in the long run.

Repayment vs. Interest-Only Mortgages

Depending on your situation, choosing between the two can be tricky. With a repayment mortgage type, you pay off both the loan (capital) and the interest each month. By the end of the mortgage term, you will have fully paid off the property. It’s the most straightforward and secure route for homeowners who want to build equity steadily and avoid large lump-sum payments in the future.

Interest-only mortgages work differently. You only pay the interest each month, which makes your monthly payments much lower. However, you’re not repaying any of the loan itself. This means that at the end of the mortgage term, you still owe the full amount and will need a clear plan for repaying it - such as savings, investments or selling the property. Because of the risk involved, lenders are more cautious with interest-only mortgages, and they’re generally better suited to experienced buyers or investors.

Which mortgage is right for you?

There’s no one-size-fits-all answer. First-time buyers often lean toward fixed-rate mortgages for their simplicity and stability, but those with growing incomes or strong savings might consider variable, tracker or offset options. Each mortgage type has its pros and cons, and the best choice depends on your current circumstances and future plans.