About mortgages

The different types of mortgage deals on the market can seem confusing. Here is a brief rundown of the main mortgage types available, based on the mortgage rate charged.

Fixed Rate mortgage

Fixed rate mortgages are offered at a specific rate of interest over a specific period of time meaning your mortgage payments will be the same each month over the period. This helps you budget and means you haven’t got to worry about interest rate changes resulting in your mortgage repayments going up. However you will not benefit from lower monthly payments when interest rates are lower. Fixed rate mortgages are most commonly offered for two, three and five-year periods although some lenders also offer 10 and 25 year terms.

Standard Variable Rate (SVR) mortgage

The SVR is a mortgage lender’s default rate which usually follows the Bank of England Base Rate. (The rate of mortgage paid will be a few percent higher than the Base Rate.) It is important to check whether lenders' variable rates are higher or lower than their fixed rates. Once a fixed rate mortgage ends, if you do not (or cannot) remortgage then you will start paying interest based on the lender’s SVR, which may involve a jump or reduction in your mortgage repayments. It is important to be aware that lenders are not obliged to change their SVR when the Base Rate moves and neither may they move their SVR by the same percentage as the Base Rate or make immediate changes. As a result of these variables, a standard variable rate mortgage can change at any time and your budget planning needs to allow for this.

Discount rate mortgage

This is where the lender offers you a rate which is lower than its SVR for a given period, usually the first few years of the loan. After this the mortgage will switch back to the SVR. Discount rate mortgages are attractive as they offer you a saving in the early part of the mortgage – and as it is linked the lender’s SVR, your monthly payments should drop if the Bank of England Base Rate drops (assuming the lender passes on the rate cut!)

Capped rate mortgage

Capped rate mortgages are similar to SVR mortgages with the added advantage that the rate cannot rise above a certain level for a designated length of time. Capped mortgages therefore give (temporary) protection against rising rates but are typically more expensive than fixed rates, so should be chosen only if you feel interest rates are equally likely to rise. As with all mortgages, always read the fine print before proceeding.

Base rate tracker mortgage

This mortgage will track the Bank of England Base Rate. This can make advanced budgeting more difficult because your mortgage payments may change on a monthly basis but a tracker is a good bet in an environment of falling interest rates.

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