Interest Rates Explained

When choosing the best mortgage type for you, it is best to be able to understand the difference between the two main types which are Fixed Rate and Variable (more commonly known as a Tracker Rate) mortgages.

Here we look at both options for you, how they work and which may be best for you.  Speaking with us will help, we may offer an idea that you may not have thought of.

Different types of mortgages

Fixed Rate Mortgages

One of the most popular types of mortgage chosen in recent years, mainly due to the low rates of interest available and the small difference between Fixed Rates and other types of interest rate.

The bank will offer you a mortgage with a predetermined rate of interest which will apply for a period of between 2 and 5 years, during this time your monthly payment will not change regardless of what happens to interest rates. After the initial fixed rate period has expired you will revert to the banks standard rate. You will be free to look at other lenders to see if they can offer you a better rate at that time.

Variable Rate Mortgages

These include mortgages such as the Tracker mortgage which is very popular and also variable rate mortgages and discounted rate mortgages, all of which we explain below.

Tracker Rates are the second most popular mortgage; these are quite the opposite to a fixed rate in that the rate is linked to the Bank of England base rate. So if the base rate changes, your mortgage payments will change.

Typically your bank will set the rate at a margin above the base rate, so if the base rate is 0.50% and your bank offers you a rate of 2% above the base rate, your actual mortgage interest rate will be 2.50%. If the Bank of England put the base rate up by 1%, your mortgage rate would increase to 3.50%. This would add about £25 a month to the repayments on a £100,000 mortgage.

As with fixed rate mortgages, trackers are available over different terms: most commonly two or five years. With these deals, you’ll be charged a penalty if you end the mortgage before the initial tracker period has expired.

Discounted Rate mortgages are also variable like the tracker so your mortgage payments can increase or decrease, however they are not linked to the Bank of England’s Base Rate but to the Banks own Standard Variable Rate (SVR). the key difference is that this rate can change independently of the Bank of England.

You don’t get to budget with a Discounted Rate but you do get the possibility of a cheaper deal to start with and that your rate could decrease.