Our mortgages section is designed to answer most of the most frequently asked questions and provides detailed information on a range of mortgage-related issues, including: how to get a mortgage if you are a first time buyer, how remortgaging can help you fund a major home improvement project, plus what to do if you have bad credit or are self employed, as well as mortgages for self build properties, and more.
The main types of mortgages explained
Fixed rate mortgage: With this kind of mortgage, the interest you have to pay to the lender will stay the same for a period of time that is set and will not change. This means you will know exactly how much you will need to pay for the duration of that period of time, without having to worry about changes to interest rates or fluctuations in the market. The amount of time that tends to be fixed is usually between two and five years, and after this has elapsed you will most likely be transferred to a standard variable rate mortgage (see below). The benefit of this kind of mortgage is that it can give you peace of mind: for the duration of the fixed term, you will know exactly what you have to pay. One drawback of a fixed rate mortgage is that in times of low interest rates you might find yourself paying more than those with a standard variable rate mortgage.
Standard variable rate mortgage
A standard variable rate (SVR) is the lender’s normal, or default, rate, i.e. the interest a lender charges on a mortgage when there is no fixed term agreement or discount in place. This is the type of mortgage that you will be transferred to at the time when the ‘fixed term’ of your tracker or fixed term mortgage comes to an end. The lender can alter its SVR at any time, either by raising it or lowering it, and the borrower has no control or power over what happens to it. The advantage of an SVR is that while interest rates are low, it is highly likely that your lender’s standard variable rate will be low too. At the time of writing, the Bank of England has set the base rate of interest at a record low of 0.5% for the last two years, which means that for many people it is a good time to have an SVR mortgage. Of course, the downside is that this could change at any time, meaning you might end up having to pay significantly more.
This type of mortgage can be seen as a kind of compromise between a fixed rate and a variable rate mortgage, lessening the drawbacks and the potential benefits of each. Essentially, a tracker mortgage is one that is pegged to the base rate at a set margin (usually 1% either above or below) for a fixed term – often a year. This means that when the base rate is low, you can be sure of paying a low amount of interest for the duration of the tracker mortgage, after which you will usually be transferred to a SVR mortgage. The benefits of a tracker mortgage are similar to those of a fixed rate mortgage, in that you know how much you will be expected to pay for a set period as long as the base rate doesn’t change dramatically. While the base rate is low, you can take advantage of this by overpaying on your mortgage, thus reducing the amount of time it will take to completely pay it off and thereby cutting down on the overall amount of interest. The drawback of a tracker mortgage is that you don’t have the same security as you do with a fixed term mortgage: if the base rate suddenly goes up, so do your repayments.
This is similar to an SVR, but set at a ‘discount’, slightly below the lender’s standard variable rate for a set amount of time.