Property > Mortgages
Types of Mortgage
The type of mortgage you choose is an important decision within the house buying process due to its impact on your monthly repayments. Below, you can find an initial insight into each mortgage type.
In This Article
Fixed-Rate Mortgage
Much like the name suggests, you agree to a fixed interest rate with this type of mortgage, which is locked in for a set period of time (usually 2-5 years).
The main benefit of a fixed-rate mortgage is that you don’t need to worry about the market influencing your rate and know exactly how much you’ll pay per month during the agreed timeframe.
When your fixed-rate mortgage ends, your lender will move you onto their standard variable rate mortgage (see below), which often has a higher interest rate. For this reason, people tend to hunt around for a new deal when their previous deal ends.
Tracker Mortgage
Your rate will mirror another base rate, usually the Bank of England Base rate, plus an agreed margin for the lender.
Bank of England Base Rate:
This is the rate the Bank of England charges commercial banks or financial institutions for borrowing money
For example, let’s say the lender’s tracker mortgage mirrors the Bank of England base rate, which is set at 0.5%. If the lender were to add a margin of 1.5%, you would be paying 2% interest. If the base rate were to drop to 0.4%, your interest would drop to 1.9% (0.4% + 1.5%).
In some circumstances, your tracker mortgage may include a ‘collar rate’. This means that your interest rate can’t go below a certain level, even if the base rate drops drastically.
Standard Variable Rates (SVR)
The SVR is the rate you get transferred to if your existing deal ends. Although factors such as the base rate might influence the SVR, the lender determines the interest rate themselves, and they have the freedom to increase or decrease the rate as they wish. For this reason, your monthly repayments are variable and would change as the lender’s rates fluctuate.
To avoid paying the higher rate, you may look for another deal once your current deal ends.
Discount Mortgage
A discount mortgage is where the lender offers you a discount on its standard variable rate for an agreed time period. For example, if the SVR was 3.5% and you received a 1% discount, you would pay 2.5%. If the SVR were to be increased by 1%, so would your discounted rate. At the end of the discounted period, you would be moved onto the SVR.
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