Fixed Rate Mortgage
If you have a fixed rate mortgage, the interest rate you pay will remain the same (fixed) for a specified period (which can be anything from 2 years to 10 years). This means that your monthly repayments will stay exactly the same, enabling you to know how much you’ll pay each month and therefore budget accordingly.
It’s worth noting, however, that if interest rates fall elsewhere, you will be locked into your fixed rate deal. On the other hand, though, if interest rates rise, you’ll pay less in relation.
Variable Rate Mortgage
If you have a variable rate mortgage, your interest rate could either increase or decrease each month, meaning that the amount you repay each month could change.
You will be charged at your lender’s standard variable rate (SVR) which is subject to change frequently and at the lender’s discretion.
There are a number of different types of variable rate mortgages, including tracker, discount and capped rate.
- Tracker mortgage – This type of mortgage follows the Bank of England’s base rate and rises or falls along with it. So, if the base rate increases or decreases, so does your interest rate. Tracker mortgages typically charge the base rate plus a few percent.
- Discount mortgage – This type of mortgage means you get a discount on your lender’s SVR for a set period. For instance, if your lender’s SVR is 3% but your mortgage came with a 1% discount, you’d pay 2% for the set period. However, the actual amount you pay each month can change if the lender changes their SVR.
- Capped rate mortgage – This type of mortgage implements a cap on how high the interest rate can increase, meaning it won’t rise above a certain level.
You can find out more about the different types of mortgages available in our previous blog: What are the Different Types of Mortgages?