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Fixed rate mortgages
Fixed rate mortgages offer you a fixed interest rate for a set number of years, usually two, three or five years depending on what you choose. This means during that time your monthly repayments will not change.
- Predictable payments: your monthly payments will stay the same, so it's easier to budget.
- Stability: you’ll be protected from rising interest rates. Your monthly repayments won’t go up during the fixed period.
- Less flexibility: if interest rates go down, your monthly repayments will stay the same.
- Locked in: if you want to repay your mortgage, or pay more than your usual monthly payment you may have to pay early repayment charges (ERCs).
Remember, when your fixed rate deal finishes, the rate of interest can increase. Make sure you look at what you might be paying in the future and that you can afford it.
Discounted standard variable rate mortgages
Discounted standard variable rate mortgages normally offer a lower rate of interest than the mortgage lenders standard variable rate (SVR). Like fixed rate mortgages you tend to choose how long you want the discount to last – two, three and five years are quite common.
- Lower initial rates: your monthly repayments during the discount period will usually be lower than the standard variable rate (SVR).
- Potential savings: if interest rates drop, your monthly repayments might reduce as well.
- Unpredictable payments: monthly payments can go up and down, making budgeting trickier.
- Risk of higher rates: if interest rates rise, your payments can go up also.
Like fixed rate mortgages, it’s important to remember that the rate of interest you go to once your discounted rate has finished can be higher, so make sure you can afford any increases.
Tracker mortgages
Tracker mortgages have interest rates that follow the Bank of England base rate plus a set percentage. When the Bank of England change their rate up or down your rate will change by the same amount.
- Transparency: easier to understand how the rates are set.
- Potential savings: if the base rate goes down, your payments will reduce.
- Risk of higher rates: if the base rate increases, your payments will go up.
- Uncertainty: monthly payments can fluctuate, making it harder to budget.
Interest only mortgages
Interest only loans usually allow the repayment of interest only for the whole mortgage term, with the capital balance paid off at the end of the mortgage term via a repayment plan such as investments or savings.
- Lower payments: monthly payments are lower than a repayment mortgage.
- As you're not paying off the capital you won't increase your equity in your home by making your monthly interest payments. You can only increase your equity by paying off some of the capital, or if the value of your property increases.
- Your monthly payment doesn't include any amount towards your repayment plan to repay the amount you owe at the end of the mortgage term.
These are some of the common types of mortgages, each with their own pros and cons. Understanding these options can help you make a better decision based on your finances and long term plans.
