How to choose the right type of mortgage
Confused by all the available mortgage types? This short guide explains the ins and outs of different kinds of mortgage rates. This way, you’ll be ready to make the right choice for your needs and pockets.
Fixed-rate, tracker, discount, and so on. Whether you’re looking for your first mortgage, buying a new home, or remortgaging to a new deal, there are lots of options available.
It’s an important decision, as getting a better mortgage deal can save you thousands of pounds.
Whatever type of mortgage you choose, it’s a good idea to shop around for a new deal when your current one ends. This way, you’ll avoid getting stuck on the lender’s expensive standard variable rate (SVR).
What is a mortgage?
First things first, though, what is a mortgage? A mortgage is a type of loan you take out to fund the purchase of a property.
In most cases, when buying a home, you’ll be asked to put down a deposit. This could be, for instance, 5% of the house’s price tag. Then, to secure the property, you’ll pay the remaining amount by using a mortgage from a bank or building society.
Based on the plan you decide to pick, monthly instalments will last over a set period (e.g. five, ten, twenty years, if not more) until you’ve paid back your entire debt.
With a fixed-rate mortgage, the interest rate remains the same throughout the entire deal period. This is typically two to five years, although it is possible to get 10-year fixed rates too.
So, if you opt for a fixed rate, you don’t need to worry about the Bank of England (or mortgage lender) increasing rates and making your mortgage more expensive.
The flip side of this security is that you could end up paying over the odds if interest rates fall during the term of your deal. This is especially true if you want switch to another deal, as you’ll usually have to pay a hefty early repayment charge (ERC).
If mortgage rates go up a lot while you’re on a fixed rate, the amount you pay won’t be affected while you’re in your deal period. But that means you might feel the pinch more at the end of the deal, especially if you move on your lender’s SVR.
At the time of writing (April 2023), mortgage lenders have improved their rates, with fixed-rate deals being at their lowest since October 2022.
Your mortgage payments will remain the same, even if interest rates change. This way, you know your mortgage payments will not increase to an unaffordable level during the deal period
Fixed monthly payments make it easier to budget and plan ahead
If interest rates do rise, your deal could end up feeling even more competitive against the market
You are generally tied in for the length of the deal. So, if interest rates fall, you can’t take advantage of cheaper deals without paying a penalty (ERC)
If you need to sell your property before the deal comes to an end, you’ll also have to pay an ERC. This may well be thousands of pounds
A tracker mortgage is a variable-rate mortgage that tracks the Bank of England base rate as it moves up and down. So, if the base rate changes, your mortgage rate will change too. You can monitor how base rate changes will affect your mortgage repayments by using our base rate calculator.
Example: Let’s say the base rate is at 0.5%. With a tracker mortgage charging base rate plus 2%, you’d currently be paying 2.5%. But if the base rate rises to 1%, your rate would go up to 3%.
As with fixed-rate mortgages, trackers are available over different terms: most commonly two or five years, and some impose a penalty if you want to pay off the mortgage during that time.
You may also be able to take out a lifetime or term tracker mortgage that tracks the base rate for the entire term. These do not generally involve penalties, so can be a good option if you don’t want to be tied in. However, these deals are not always available.
The rates on the leading tracker mortgages tend to be lower than on fixed-rate deals
If interest rates go down during the term of your deal, your monthly payments will also fall
With a tracker deal, you know your interest rate will only change if the Bank of England base rate moves up or down
Your monthly repayments will rise if the base rate goes up, potentially making your mortgage unaffordable
You might have to pay an ERC if you want to sell your home or remortgage during the deal period
A discounted variable-rate mortgage tracks the mortgage lender’s standard variable rate. This means that, if the SVR goes up or down, so does your mortgage interest rate. Even if the Bank of England base rate remains the same, your mortgage could become more expensive if your lender decides to increase its SVR.
Let’s say, for example, that the mortgage lender’s SVR is currently 4.75%. With a deal offering you a discount of 2.5% on that rate, your mortgage interest rate would be 2.25%. But if the lender decides to increase its SVR to 5% (whether or not the base rate rises by 0.25%), your rate will go up to 2.5%.
Like tracker and fixed-rate deals, discount mortgages are available over different terms. These are typically one to five years. If you want to switch to a new deal or sell your property within that time, you could face an ERC.
The best discount mortgages often have lower rates than the best fixed-rate deals
If your lender reduces its SVR during the term of the deal, your mortgage rate will also fall
Your monthly repayments will rise if the lender’s SVR goes up, which could happen at any time
Your mortgage lender is not obliged to pass on any base-rate cuts during the term
There might be an ERC if you want to sell your home or remortgage during the deal period
What other mortgage types are there?
There are many other mortgage types on the market. If you’re thinking about taking a loan, here are a few extra options you could consider:
Standard variable rate
A standard variable rate (SVR) is an interest rate set by your lender, usually a few percentage points above the Bank of England’s base rate. This is the base rate that tends to influence all loan and mortgage interest rates in the UK.
If you're on an SVR mortgage, you’re probably paying more than you need. Switching to a fixed- or tracker-rate deal can usually save you money, and there shouldn’t be an early repayment charge.
An interest-only mortgage allows you to pay just the interest charged on the loan each month. You don’t have to repay the amount you’ve borrowed, which is sometimes known as the ‘capital’, until the end of the term. This means your monthly payments will be less than on a repayment mortgage. However, you must make provisions to repay the original loan at the end of the term.
An offset mortgage allows you to use your savings against the amount you owe on your mortgage, reducing how much interest you pay. The value of your savings is deducted from your outstanding mortgage balance, so you pay interest on the remainder. Offsets work well if you pay more in mortgage interest than you earn in a savings account.
It’s easy to find and compare mortgages from a range of lenders with MoneySuperMarket. Whether you’re looking for a fixed-rate, tracker, or discount mortgage, our mortgage comparison tool can help you find a great deal for your individual circumstances.
Your home may be repossessed if you do not keep up repayments on your mortgage.