With a fixed rate mortgage the rate stays the same, so your payments are set at a certain level for an agreed period. At the end of that period, the lender will usually switch you onto its SVR (see Variable rate).
You may have to pay a penalty to leave your lender, especially during the fixed rate period. You may also have to pay an early repayment charge if you pay back extra amounts during the fixed rate period.
A fixed rate mortgage makes budgeting much easier because your payments will stay the same – even if interest rates go up. However, it also means you won’t benefit if rates go down.
Your monthly payment fluctuates in line with a rate that’s equal to, higher, or lower than a chosen Base Rate (usually the Bank of England Base Rate).
The rate charged on the mortgage ‘tracks’ that rate, usually for a set period of two to three years. You may have to pay a penalty to leave your lender, especially during the tracker deal period. You may also have to pay an early repayment charge if you pay back extra amounts during the tracker period.
A tracker may suit you if you can afford to pay more when interest rates go up, in exchange for benefiting when they go down. It’s not a good choice if your budget won’t stretch to higher monthly payments.
Like a variable rate mortgage, your monthly payments can go up or down. However, you’ll get a discount on the lender’s SVR for a set period of time, after which you’ll usually switch to the full SVR.
You may have to pay a penalty for overpayments and early repayment and the lender may choose not to reduce (or delay reducing) their variable rate – even if the Base Rate goes down.
Discounted rate mortgages can give you a gentler start to your mortgage, at a time when money may be tight. However, you must be confident you can afford the payments when the discount ends.
Your monthly payment fluctuates in line with a Standard Variable Rate (SVR) of interest, set by the lender.
You probably won’t get penalised if you decide to change lenders and you may be able to repay additional amounts without penalty too. Many lenders won’t offer their standard variable rate to new borrowers.
These schemes allow you to overpay, underpay or even take a payment ‘holiday’. Any unpaid interest will be added to the outstanding mortgage; any overpayment will reduce it. Some have the facility to draw down additional funds to a pre-agreed limit.
Capped and Collared Rate
Some lenders offer variable, tracker or discounted products that have a pre-defined upper ‘cap’ or lower ‘collar’ that the rate will not breach when rates go up and down.
Taking out an offset mortgage enables you to use your savings to reduce your mortgage balance and the interest you pay on it. For example, if you borrowed £200,000, but had £50,000 in savings, you would only be paying interest on £150,000.
Offset mortgages are generally more expensive than standard deals, but can reduce your monthly payments, whilst still giving you access to savings.