There is so much choice when it comes to picking a mortgage, that it can seem totally baffling.
The two main types of Mortage
Mortgages fall into two main categories:
- Fixed rate – the interest you’re charged stays the same for a number of years, typically between two to five years
- Variable rate – the interest you pay can change
Also covered is the Tracker Mortage, which is a type of variable rate mortgate
Fixed rate mortgages
The interest rate you pay will stay the same throughout the length of the deal no matter what happens to interest rates. You’ll see them advertised as ‘two-year fix’ or ‘five-year fix’, for example, along with the interest rate charged for that period.
- Peace of mind that your monthly payments will stay the same, helping you to budget
- Fixed rate deals are usually slightly higher than variable rate mortgages
- If interest rates fall, you won’t benefit
Variable rate mortgages
With variable rate mortgages, the interest rate can change at any time. Make sure you have some savings set aside so that you can afford an increase in your payments if rates do rise.
Variable rate mortgages come in various forms:
Standard variable rate (SVR)
This is the normal interest rate your mortgage lender charges homebuyers and it will last as long as your mortgage or until you take out another mortgage deal. Changes in the interest rate may occur after a rise or fall in the base rate set by the Bank of England.
- Freedom – you can overpay or leave at any time
- Your rate can be changed at any time during the loan
This is a discount off the lender’s standard variable rate (SVR) and only applies for a certain length of time, typically two or three years.
- Cost – the rate starts off cheaper which will keep monthly repayments lower
- If the lender cuts its SVR, you’ll pay less each month
- Budgeting – the lender is free to raise its SVR at any time
- If Bank of England base rates rise, you’ll probably see the discount rate increase too
Tracker mortgages move directly in line with another interest rate – normally the Bank of England’s base rate plus a few percent. So if the base rate goes up by 0.5%, your rate will go up by the same amount.
Usually they have a short life, typically two to five years, though some lenders offer trackers which last for the life of your mortgage or until you switch to another deal.
- If the rate it is tracking falls, so will your mortgage payments
- If the rate it is tracking increases, so will your mortgage payments
- You may have to pay an early repayment charge if you want to switch before the deal ends
One last thing
When comparing these deals, don’t forget to look at the fees for taking them out, as well as the exit penalties.