Fixed-rate mortgages
A fixed-rate mortgage will mean your monthly payments should stay the same until an agreed date, no matter what happens to interest rates in the market.
Fixed-rate periods come in various different lengths, for example, 2, 3 and 5 years.
Tracker mortgages
Tracker mortgages follow the Bank of England’s Base Rate and rise or fall along with it. The interest rate charged is the Bank of England’s Base Rate plus an agreed margin.
There are ‘lifetime’ trackers for the life of the mortgage, and term trackers which may be for 2 or 3 years.
Standard variable rate (SVR) mortgages
The SVR is the rate of interest that’s usually charged once a fixed rate or term tracker period ends. You can usually move to another fixed or tracker product instead of moving onto a SVR, if you wish.
Some lenders may also let you take out a mortgage on their SVR. Your lender decides the rate and may decide to increase or decrease it over the period of your mortgage.
Discount rate mortgages
Discounted mortgages offer you a reduction from the lender’s Standard Variable Rate (SVR) for a certain period of time, typically two to five years.
Mortgages with discounted rates can be some of the cheapest deals but, as they are linked to the SVR, your rate will go up and down when the SVR changes.
Understanding your repayment options
When deciding on a mortgage, you also have payment choices to make:
- Capital repayment
- Interest only
These options need to be considered carefully.
What is a capital repayment mortgage?
With a capital repayment mortgage, the monthly repayments include an element which repays the borrowed capital, as well as a payment for the monthly interest of the loan.
With this repayment method, you can ensure your mortgage is fully paid off at the end of the mortgage period, as long as you haven’t missed any repayments.
What is an interest-only mortgage?
With an interest-only mortgage, your monthly payment only covers the interest charged on your loan for that month, so the amount you owe in capital doesn’t reduce over time.
You’ll need to demonstrate to the lender that you’ll have some way of paying off the debt in the future (such as an investment or a second property you could sell).
Interest only mortgages are commonly chosen for buy to let properties.
Frequently Asked Questions
What is the difference between a fixed-rate and a variable-rate mortgage?
With a fixed-rate mortgage, your monthly payments stay the same until an agreed date, whatever happens to interest rates. With a variable-rate mortgage, such as a tracker, discount or standard variable rate, your interest rate and payments can go up or down during the deal.
How is a tracker mortgage rate worked out?
A tracker mortgage charges the Bank of England base rate plus an agreed margin. When the base rate rises or falls, your rate moves with it.
What is the difference between a lifetime tracker and a term tracker?
A lifetime tracker follows the base rate for the whole life of your mortgage. A term tracker only tracks it for a set period, such as two or three years, after which you’ll usually move onto the lender’s standard variable rate unless you switch to a new deal.
Do I have to go onto the standard variable rate when my deal ends?
No. The SVR is usually what you’re charged when a fixed or tracker deal ends, but you can normally move to another fixed or tracker product instead. Some lenders also let you take out a mortgage on their SVR from the start.
Are discount mortgages cheaper?
Discount mortgages, which offer a reduction on the lender’s SVR for a set period, typically two to five years, can be some of the cheapest deals. However, because they’re linked to the SVR, your rate will rise and fall whenever the lender changes its SVR.
What do I need to show a lender to get an interest-only mortgage?
With an interest-only mortgage, your payments only cover the interest, so the amount you owe doesn’t go down. You’ll need to show the lender how you’ll repay the loan at the end of the term, for example through an investment or by selling a second property. Interest-only mortgages are commonly used for buy-to-let.
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About the Author: Doug Hall, Director at 3mc
This article was written by Doug Hall, a Director at 3mc, one of the UK’s leading mortgage packagers, distributors and brokers. Doug has over 35 years of experience in the mortgage and specialist lending industry, giving him an unparalleled understanding of the challenges and opportunities facing landlords, brokers, and property investors across the UK. A recognised voice in the industry, Doug regularly speaks at major industry events and is widely respected by lenders, intermediaries, and fellow professionals alike. His insight is shaped by three decades on the front line of mortgage distribution, working closely with the brokers and lenders who keep the UK property market moving.