The variety of deals on the market can be confusing. Here is a brief rundown of the main mortgage types available which are based on the mortgage rate charged.

Fixed Rate mortgage

These mortgages are offered at a specific rate of interest over a specific period of time meaning your mortgage payments will be the same each month over the period. This helps you budget and means you haven’t got to worry about interest rate changes resulting in your mortgage repayments going up. But of course you will not benefit from lower monthly payments if mortgage rates fall. Fixed rate mortgages are most commonly offered for two, three and five-year periods although some lenders also offer 10 and 25-year terms. 

Standard Variable Rate (SVR) mortgage

The SVR is a mortgage lender’s default rate which usually follows the Bank of England base rate. However, SVR mortgages  are not the cheapest. Once you come off a fixed rate, if you do not (or cannot) remortgage then you will start paying interest based on the lender’s SVR, which may involve a jump in your mortgage repayments.   It is important to be aware that lenders are not obliged to change their SVR when the Base Rate moves and neither may they move their SVR by the same percentage as the Base Rate. As a result of these variables, it is often difficult to budget when on an SVR because the rate can change at any time.

Discount rate mortgage

This is where the lender offers you a rate which is lower than its SVR for a given period, usually the first few years of the loan. After this the mortgage will switch back to the SVR. They are attractive as they offer you a saving in the early part of the mortgage – and as it is linked the lender’s SVR, your monthly payments should drop if the Bank of England Base Rate drops (assuming the lender passes on the rate cut!).  

Capped rate mortgage

Capped mortgages are similar to SVR mortgages with the added advantage that the rate cannot rise above a certain level for a designated length of time. Therefore capped mortgages give (temporary) protection against rising rates but are typically more expensive than fixed rates, so should be chosen only if you feel interest rates are equally likely to rise ..As with all mortgages, always read the fine print before proceeding.

Base rate tracker mortgage

This mortgage will track the Bank of England base rate. It can make advance planning more difficult because your mortgage payments may change on a monthly basis but a tracker is a good bet in an environment of falling interest rates.