Fixed Rate & Variable Rate Mortgages
There are two main types of mortgage:
• fixed rate mortgages
• variable rate mortgages (which include standard variable rate, tracker, discount and capped rate mortgages)
Fixed Rate Mortgages
With fixed rate mortgages, you will always pay the same amount every month. So regardless of interest changes elsewhere, your lender guarantees your interest rate will stay the same throughout the entire deal period (which is usually between 2 – 5 years, but 10-year fixed rate deals are also available).
This provides peace of mind and helps you to budget as your monthly mortgage payment won’t change. The downside of this, though, is that if interest rates fall, you will be locked into your fixed rate deal.
Standard Variable Rate (SVR) Mortgages
After the fixed period finishes, you will normally move onto your lender’s standard variable rate (SVR) by default. This is the normal interest rate your lender charges and will last as long as your mortgage or until you take out another mortgage deal.
Each lender has its own SVR that it can set at whatever level it wants – they can also change their SVR at any time, so your payments could increase or decrease.
A tracker mortgage is a variable-rate mortgage that follows the Bank of England’s base rate and rises or falls along with it. So, if the base rate goes up or down, so does your interest rate.
Tracker mortgages typically charge the base rate plus a few percent.
This type of mortgage means you get a discount on the lender’s SVR for a certain period of time (normally 2 to 5 years). For example, if your mortgage lender’s SVR is 3.5% but your mortgage came with a 1% discount, you’d pay 2.5% for the specified period of time.
This is also a type of a variable-rate mortgage, so the amount you pay each month can change if the lender changes their SVR.
Capped Rate Mortgages
Capped rate mortgages implement a cap on how high the interest rate can rise. This is still a variable mortgage, but it provides certainty as the rate won’t rise above a certain level.
As this type of deal provides additional security, interest rates tend to be higher than other types of variable mortgages.