Mortgages......

Mortgage Types Explained

A clean guide to fixed, tracker, discount, SVR, interest-only and repayment mortgages

Mortgages generally fall into two categories: fixed-rate deals, which guarantee your rate for a set number of years, and variable-rate deals, where your rate can go up or down depending on economic conditions.

This guide explains how each type of mortgage works, and outlines some specialist mortgage structures available to borrowers.

Important: This information is for general information only and does not constitute financial advice. Check the particular terms and conditions of a provider before committing to any financial product.

Fixed-rate mortgages

Fixed-rate mortgages are the most common type of loan taken out by homebuyers and homeowners remortgaging.

With a fixed-rate mortgage, you pay the same interest rate for a set number of years, so your monthly repayments remain consistent regardless of what happens to the Bank of England base rate.

Borrowers most commonly take out two-year or five-year fixed-rate mortgages, although three-, seven-, ten- and even fifteen-year fixed terms are available.

At the end of the fixed period, you normally need to remortgage. If you do not, you will usually move to your lender's standard variable rate (SVR), which can be significantly more expensive.

Tracker mortgages

Tracker mortgages are variable-rate deals that track the Bank of England base rate plus a set percentage.

For example, if the base rate is 3.75% and your tracker is base rate plus 1%, your mortgage rate would be 4.75%.

If the base rate rises, your monthly repayments will usually rise too. If it falls, you should usually pay less each month, although this depends on the mortgage terms.

Some tracker mortgages have a collar, which means the rate cannot fall below a specified level. In that case, a large fall in the base rate may not be fully reflected in your payments.

Like fixed-rate mortgages, trackers commonly have an introductory deal period, often two years. After this, you may move to the lender's SVR if you do not remortgage.

Discount mortgages

Discount mortgages are variable-rate deals that charge the lender's SVR minus a fixed margin.

For example, if your lender's SVR is 5% and your deal is SVR minus 2%, you would pay 3%.

If the lender increases its SVR, your payments will usually rise. If the SVR falls, you will usually pay less.

Discount mortgages commonly come with an introductory deal period of around two years.

Standard variable rate (SVR) mortgages

Each lender sets its own standard variable rate. The SVR is usually higher than the rates available on fixed, tracker or discount mortgage deals.

SVRs do not necessarily change often and are not directly linked to the Bank of England base rate, although base-rate changes can influence them.

For example, if the base rate rises by 0.25 percentage points, a lender does not have to increase its SVR by exactly the same amount, although many lenders may choose to raise it.

Pros and cons of the main mortgage types

Which type of mortgage is best?

Whether a fixed or variable-rate mortgage is more suitable will depend on factors including:

• Whether your income is likely to change.

• Whether you prefer to know exactly what you will pay each month.

• Whether you could comfortably manage if your monthly payments increased.

Interest-only and repayment mortgages

A mortgage will generally be set up on either an interest-only or repayment basis.

With an interest-only mortgage, your monthly payments cover the interest charged on the loan. You must have a credible plan for repaying the capital balance at the end of the mortgage term.

With a repayment mortgage, which is the more common structure, each monthly payment covers interest and repays part of the original loan.

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