Learn more about the types of mortgages available
Variable Rate Mortgages
Your monthly payment fluctuates in line with a standard variable rate (SVR) of interest, which is set by the lender. You probably won’t get penalised if you decide to change lenders and you may also be able to repay additional amounts without incurring a penalty. Many lenders won’t offer their SVR to new borrowers.
These schemes allow you to overpay, underpay or even take a payment ‘holiday’. Any unpaid interest will be added to the outstanding mortgage, while any overpayment will reduce it. Some have the facility to draw down additional funds to a pre-agreed limit.
Tracker Rate Mortgages
Your monthly payment fluctuates in line with a rate that’s lower, or more likely higher than a chosen Base Rate (usually the Bank of England Base Rate). The rate charged on the mortgage ‘tracks’ that rate, usually for a set period of two to three years.
You may have to pay a penalty to leave your lender, especially during the tracker period. You may also be liable to pay an early repayment charge if you overpay on your mortgage during the tracker period. A tracker mortgage may suit you if you can afford to pay more when interest rates go up – and, of course, you’ll benefit when they go down. It’s not a good choice if your budget won’t stretch to higher monthly payments.
With a fixed-rate mortgage, the rate stays the same, so your payments are set at a certain level for an agreed period. At the end of that period, the lender will usually switch you onto its SVR.
You may have to pay a penalty to leave your lender, especially during the fixed-rate period. You may also be liable to pay an early repayment charge if you overpay during the fixed-rate period. A fixed-rate mortgage makes budgeting much easier because your payments will stay the same during the fixed-rate period – even if interest rates go up. On the other hand, it also means you won’t benefit if rates go down.
The two most common ways of repaying your mortgage are capital repayment and interest only