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Find out about the different types of mortgage rates that you can get on your mortgage; Fixed Rate · Variable Rate · Tracker · Discount · Capped.
The “rate” of a mortgage is the interest rate that you must pay on the mortgage amount you borrow. The rate you receive (and so the monthly payment you will make) will depend on many factors, such as how much deposit you have and which lender you go with.
There are different types of rates in the UK residential mortgage market, with the most common being:
If after reading this you are still unsure which is the right rate for you or if you have any questions, then please get in touch. We are mortgage brokers based in Bristol and offer advice on a wide range of mortgages.
As it sounds, a “Fixed Rate” is where the interest rate you pay is fixed for a set period of time. No matter what happens to other interest rates you are guaranteed to only pay that rate, and so if you make no over/under payments then your monthly payments will not change.
The fixed rate period is only guaranteed for a set number of years, usually 2, 3, or 5, although there are others. After the Fixed Rate period ends then you usually revert to the lenders default rate, often referred to as the SVR (Standard Variable Rate). This is often more expensive than the best rates on the market, so it is at this point that many mortgage borrowers would be advised to contact a mortgage broker to look for a new mortgage.
The main benefit is certainty of payment; no matter what happens to the Bank of England base rate or to other mortgage rates your rate and payments will not change. This will give you certainty that you will not face a steep increase in mortgage payments and help you to budget better for the future. However, if other interest rates do drop then your rate will not. There are also often hefty penalties to pay if you want to leave your mortgage during the fixed rate period (called an Early Repayment Charge).
A Variable rate is a mortgage rate which can change at any point during the mortgage term, and so the payment amount will also change.
There are broadly two types, those which are linked to another major interest rate (such as the Bank of England Base Rate) and those that are instead left up to the discretion of the lender to change, often within certain boundaries. Those that are linked to a rate are referred to as “trackers” and they are usually arranged to be a set amount under or over the rate. For example, a Tracker mortgage may be “Base Rate plus 1%” and will be 1% above whatever the Base Rate is.
The main benefit of a variable rate is that they are often lower that an equivalent fixed rate mortgage and if interest rates do fall then the mortgage rate and payments will also fall (whereas a fixed rate will not). There also tends to be fewer penalties for leaving compared to a fixed rate mortgage.
However, there is a significant downside in the risk that interest rates could increase, and therefore so could your mortgage payments. If the rate increase is considerable, then so could the increase in your monthly repayments.
Discount rate mortgages are another type of variable rate mortgage. In this instance your mortgage rate is pegged at a set level below the lenders Standard Variable rate (SVR). This period only lasts for a certain amount of time, usually between 2 and 5 years. When the discount period has ended, the rate returns to the same as the SVR (i.e. the “discount” is removed).
The longer that the discount period lasts for, the lower the amount of discount tends to be.
A Tracker Mortgage has a rate which is linked to the Bank of England base rate (occasionally other rates maybe used, but the Bank of England rate is the most common). Your mortgage “tracks” the Bank of England rate which means that if the Bank of England rate moves up by 1%, then so will your mortgage rate.
The mortgage rate is usually written as tracking a certain amount above the Bank of England rate, e.g. you have a rate that tracks the Bank of England rate plus 1.50%. The time for which your rate tracks the Bank of England rate varies and can be for the entire mortgage term (Lifetime trackers) or for a set number of years, usually between 2 and 5.
There are some variations of the Tracker Rate mortgage which are explained below.
Capped Rate mortgages are a type of Variable rate; they operate in the same way by moving in line with another rate but there are caps on how high (and possibly how low) your rate could go. This helps reduce the risk that a hefty rise in interest rates could make your mortgage unaffordable. The downside is that the number of products with this type of rate is limited and they are likely to be more expensive than an equivalent variable rate.
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Leaf Financial Advisers
39 Cromwell Road,
St Andrews,
Bristol,
BS6 5HD
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