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Different types of mortgages

How to choose the right type of mortgage

Confused by all the different types of mortgages available? This short guide explains the different kinds of mortgage rates to help you make the right choice

By Rachel Wait

Published: 13 January 2021

Different types of mortgages

Looking for a mortgage deal?

Fixed-rate, tracker, discount… 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.

And whatever type of mortgage you choose, it’s a good idea to shop around for a new deal when yours ends to avoid getting stuck on the lender’s expensive Standard Variable Rate (SVR).

Fixed-rate mortgages

With a fixed-rate mortgage, the interest rate remains the same throughout the entire deal period, which is typically two to five years – although it is possible to get 10-year fixed rates.

So if you opt for a fixed rate, you don’t need to worry about the Bank of England – or your mortgage lender – increasing rates and making your mortgage more expensive.

 The flipside of this security is that you could end up paying over the odds if interest rates fall during the term of your deal, especially as you will usually have to pay a hefty early repayment charge (ERC) to switch to another deal.

If mortgage rates go up a lot while you’re on a fixed rate you 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.

Advantages

  • Your mortgage payments will remain the same, even if interest rates change – so 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

Disadvantages

  • 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 that may well be thousands of pounds

Tracker mortgages

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.

Advantages

  • The rates on the leading tracker mortgages tend to be lower than on fixed-rate deals 
  • If interest rates do 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

Disadvantages

  • 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

Discount mortgages

A discounted variable rate mortgage tracks the mortgage lender’s standard variable rate, so if the SVR goes up or down, so does your mortgage interest rate. So 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.

Example: Say the mortgage lender’s SVR is currently 4.75%. With a discount 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 – 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.

Advantages

  • 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

Disadvantages

  • 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 (early repayment charge) if you want to sell your home or remortgage during the deal period

Compare mortgages

It’s easy to find and compare mortgages from a range of lenders with MoneySuperMarket. Whether you’re looking for a fixed-rate, a tracker, or a discount mortgage, our mortgage comparison tool can help you find a great deal for your individual circumstances.

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