Mortgage Types

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Below, you can find out how each mortgage type works, then compare the pros and cons of fixed-rate, tracker and discount mortgages. 

  • Fixed-rate mortgages
    • With fixed-rate mortgages, you pay the same interest rate for the entire deal period, regardless of interest rate changes elsewhere. Two- and five-year deal periods are the most common, and when you reach the end of your fixed term you'll usually be moved on to your lender's standard variable rate (SVR). Whether you should choose a fixed or variable-rate deal depends on whether you think your income is likely to change, whether you prefer to know exactly what you will be paying each month and whether you could cope if your monthly payments went up. 

Variable-rate mortgages. There are three main types of variable-rate mortgage: 

  • Tracker mortgages  
    • With a tracker mortgage, your interest rate 'tracks' the Bank of England base rate – for example, you might pay the base rate plus 3%. In the current mortgage market, you'd typically take out a tracker mortgage with an introductory deal period (for example, two years). After this, you are moved on to your lender's standard variable rate. However, there are a small number of 'lifetime' trackers where your mortgage rate will track the Bank of England base rate for the entire mortgage term. 
  •  Discount mortgages   
    • With a discount mortgage, you pay the lender's standard variable rate (a rate chosen by the lender that doesn't change very often), with a fixed amount discounted. For example, if your lender's standard variable rate was 4% and your mortgage came with a 1.5% discount, you'd pay 2.5%. Discounted deals can be ‘stepped’; for example, you might take out a three-year deal but pay one rate for six months and then a higher rate for the remaining two-and-a-half years. Some variable rates have a 'collar' – a rate below which they can’t fall – or are capped at a rate that they can’t go above. Make sure to look out for these features when choosing your deal to ensure you understand what you're signing up to.
  • Standard-variable-rate mortgages  
    • Each lender has its own standard variable rate (SVR) that it can set at whatever level it wants – meaning that it's not directly linked to the Bank of England base rate.  The average SVR in July 2018 was 4.72%, according to Moneyfacts. This is higher than most mortgage deals currently on the market, so if you're currently on an SVR, it's worth shopping around for a new mortgage.  Lenders can change their SVR at any time, so if you're currently on an SVR mortgage, your payments could potentially go up - especially if there are rumours of the Bank of England base rate increasing in the near future. 




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