Variable Rate Mortgage

Traditional style of mortgage, where the interest rate is set by the Lender in accordance with it's standard variable rate (SVR). This rate will normally rise or fall with any changes to the Bank of England base rate.

Plus : There are usually no redemption penalties to pay if you move your mortgage to another lender. Often accompanied by Cash-Back deals (see later in this section).

Minus : The interest rate could rise or fall, hence it is difficult to plan long term. Borrowers on the SVR usually have a higher rate of interest than those on the reduced rates outlined later in this section.

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Discount Rate Mortgage

These work in the same fluctuating manner as Variable Rate Mortgages, however you receive a discount on the SVR. This means you will typically pay around 1% or so less than those on a variable rate mortgage for the period specified at the outset. At the end of this period you will revert back to the SVR.

Plus : You get a reduction on the interest rate during the discount period, hence have reduced interest payments compared with SVR, and can make use of falling interest rates.

Minus : Like Tracker Mortgages, still has all the unpredictability problems outlined under the Variable Rate Mortgage section, and can rise beyond an affordable limit when interest rates are rising. Rate rises depend on when and if a lender chooses to change their SVR, not necessarily when the BBR changes.

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Tracker Mortgage

These work in the same fluctuating manner as Variable Rate Mortgages, however the rate will track the Bank of England base rate (BBR) at a pre-agreed % difference to the BBR (for instance it could be 0.5% above BBR, which would mean, assuming BBR to be 4.75%, the rate you pay is 5.25%. This means you will typically pay less than those on a standard variable rate mortgage for the period specified at the outset, for a specific period of time.

Plus : Usually a lower rate than fixed rates at the outset, but not guaranteed to be so. When the BBR changes, you know instantly what your mortgage rate will change to. Beneficial to many borrowers when interest rates are falling

Minus : Still has all the unpredictability problems outlined under the Variable Rate Mortgages section, and can rise beyond an affordable limit when interest rates are rising.

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Fixed Rate Mortgage

As the name suggests the interest rate you pay is fixed for a specific period. The Fixed period can vary, however tend to be between 2 and 5 years (although can cover the whole life of a mortgage.). At the end of this period the loan reverts to the SVR.

Plus : You can budget for specific payments over a specific period. Don’t pay extra when BBR is rising, so can help avoid financial problems associated with rising interest rates. You know what you are paying, so no worrying about interest rates every month.

Minus : There are often redemption penalties beyond the end of the Fixed rate term, leaving you tied to a lender on the SVR, although this is increasingly not the case with any lenders having rates where there are no redemption penalties beyond the fixed rate term. Your payments will usually increase at the end of the term, leaving you with the problems outlined under the Variable Rate Mortgage section, and can cause an effect known as Payment Shock – where the borrower suddenly finds themselves unable to meat the extra burden of the payment rise.

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Capped Rate Mortgage

Similar to a variable rate mortgage, however there is an interest rate limit (Cap), above which your payments become fixed at the Cap amount, and cannot rise any further.

Plus : Although your payments can fluctuate, you can budget for the maximum amount they can go to. You still benefit from interest rate reductions, which take the SVR below your Cap.

Minus : When rates are low you will usually still pay more than those on Discount and Tracker rate mortgages, and often those on Fixed rate deals.  

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Flexible Mortgage

A generic term for mortgages which give you more flexibility than normal. They may be accompanied with savings or current accounts to offset you mortgage payments. They will typically allow you to overpay, or where sufficient overpayments have been made underpay or take a payment holiday for a period of time. They often have the facility to Draw down further money if required, up to an agreed limit.

Plus : You have more control over your finances. Overpayments can help you reduce your monthly payments, or the term of the mortgage. You still have access to the overpayments if required in an emergency. Self-Employed people often use this facility to keep the money they will eventually use to pay Tax.

Minus : Rates are typically not as low as standard Fixed or Tracker/Discount mortgages. There is often an extra fee to be paid to open offsetting savings accounts. Not everyone wants to have access to more money so readily.

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Cash-Back Deals

Many lenders offer Cash-back as part of the deal you take. These sums can vary from £200 towards legal costs to 5% (or more) of the loan. It is worth while checking what cash-back a lender is offering when comparing rates and deals which have similar interest rates.

Plus : If you need capital upfront, perhaps for furniture, then looking for a large Cash-Back deal may be an attractive option. 

Minus : There are usually penalties involved if you redeem (move) your mortgage during a specific period (often 5yrs). This can mean you are tied in, usually on the SVR, for the whole period, with all the problems outlined in the Variable Rate Mortgage section.

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