There are two main types of mortgage deal: fixed rate mortgage and variable rate mortgage. Our handy guide will help you work out which one works best for you.
In this article:
- Fixed rate mortgage
- Variable rate mortgage
- Tracker mortgage
- Discounted mortgage
- Interest-only and repayment mortgage
Fixed rate mortgage
What is a fixed rate mortgage? With this type of mortgage, your monthly payments stay the same for a pre-agreed amount of time, usually between two and five years. Once this period is over, your mortgage will automatically switch to a standard variable rate, unless you remortgage.
Find out more about the options you’ll have at the end of your fixed term mortgage.
Variable rate mortgage
What is a variable rate mortgage? With this type of mortgage, the interest rate goes up or down depending on the Bank of England’s base rate. This means the amount you pay each month is subject to change. There are several categories of variable rate mortgage.
Fixed vs variable mortgage
There are pros and cons for each type of mortgage. Fixed rate mortgages make it easier to budget as you know exactly how much you’ll be paying each month for the duration of the fixed rate term. However, you won’t benefit if interest rates fall, as you would with a variable rate. You could also incur penalties if you move home before the end of your fixed term, and the need to remortgage when your fixed term ends can be a hassle. With a variable rate you won’t have to pay exit fees if you move, however your rate will be higher and could change at any time.
Credit scores are an important part of a mortgage lender’s decision process. Read our guide to improving your credit score.
A tracker mortgage is a type of fixed rate mortgage which tracks the Bank of England base rate, plus a percentage that your mortgage provider specifies. Therefore, if the base rate goes down, so do your repayments, but they will go up if the base rate does. Many types of tracker mortgage have a ‘collar’, which means there’s always a minimum amount you have to pay, no matter the base rate.
With a discounted mortgage, your lender will give you a discount on its standard variable rate (SVR) for a fixed time period. For example, if the SVR is 5.5% and your deal offers you a discount of 2%, you’ll pay a 3.5% interest rate. As with all variable rate mortgages, if your lender’s SVR goes up, so will your repayments and if it goes down, your repayments will too.
Interest-only and repayment mortgage
With an interest-only mortgage, you only pay the interest charges on your mortgage each month. This keeps your payments lower, but it does mean you won’t be paying off any of the loan itself. After the financial crisis of 2008, it’s much more difficult to get this type of mortgage, though it’s still common for buy to let.
Find out more about how the mortgage process works from start to finish.
Repayment mortgages allow you to pay off a chunk of the capital each month, as well as the interest. This means you’ll have paid your entire loan in full by the end of the mortgage term, usually 25 years. Initially with a repayment mortgage, more of your monthly payment will go towards the interest and less towards the capital. This shifts over time, so eventually you’ll be paying more of the capital and less of the interest.
Applying for a mortgage? Find out the application steps you need to follow.
Disclaimer: The article above is only a rough guide to give you an idea of the different types of mortgages available.