In short
- A mortgage is described by how its rate is set (fixed, tracker, discount or standard variable) and how it is repaid (repayment or interest only).
- A fixed rate keeps your payment the same for the deal period; a tracker or discount rate can move up or down during it.
- When any deal ends, the loan moves to the lender's reversion rate, often its standard variable rate, unless you arrange a new deal.
- Compare deals on the rate, the fees, the APRC, the early repayment charges and any incentives, not on the headline rate alone.
- On a new build, check that the rate you choose and the mortgage offer will still stand when the home is finished.
The main types of mortgage at a glance
The main types of mortgage in the UK are fixed rate, tracker, discount and standard variable rate mortgages, with offset as a feature that can be added to some of them. A fixed rate holds your interest rate for a set period, while the variable kinds can move. Separately, every mortgage is either repayment or interest only, which decides how the loan itself is paid back.
So when people compare types of mortgage, they are making two choices, not one. The first is how the interest rate is set. The second is how you repay what you borrow.
| Type | How the rate is set | Can your payment change during the deal? | Leaving early |
|---|---|---|---|
| Fixed rate | Set at the start for a period, usually 2 to 10 years | No | An early repayment charge usually applies |
| Tracker | An outside rate, usually the Bank of England base rate, plus a set margin | Yes, when the tracked rate moves | Depends on the deal; some have no charge |
| Discount variable | The lender's standard variable rate, less a set discount | Yes, when the lender changes its standard variable rate | A charge may apply during the discount period |
| Standard variable rate (SVR) | Set by the lender, which can change it | Yes, when the lender decides | Usually no early repayment charge |
| Offset | Any of the above, with interest charged on the loan less your linked savings | Depends on the rate type | Depends on the deal |
To see what lenders publish for these types of mortgage today, the mortgage rates comparison lists lenders' published rates for your price, deposit and term, each linked to the lender's own page. It is an illustration, not advice, and names no product as right for you.
What is a fixed rate mortgage?
A fixed rate mortgage holds the interest rate at one level for a set period, so your monthly payment does not change during that time. MoneyHelper, the government-backed guidance service, says the period is usually between 2 and 10 years.
What it gives you is certainty: you know what you will pay each month until the deal ends, whatever happens to interest rates in the wider economy. What it costs you is flexibility:
- If rates fall, your rate does not fall with them.
- If you repay the loan or switch before the period ends, the lender is likely to charge an early repayment charge.
- Many fixed deals allow overpayments up to a set share of the balance each year without a charge. MoneyHelper says the limit is often 10%, and it varies by deal.
When the fixed period ends, the loan moves to the lender's reversion rate unless you arrange a new deal. The standard variable rate guide covers what happens then.
2 or 5 year fixed mortgage: the trade-offs
A two-year fix and a five-year fix are the same product with a different length. Neither is right for everyone, and the choice depends on your own plans.
| 2 year fixed | 5 year fixed | |
|---|---|---|
| Certainty | Your payment is known for two years | Your payment is known for five years |
| If rates fall | You can move to a new rate sooner | You stay on your rate until the deal ends, or pay a charge to leave |
| If rates rise | You meet the higher rates sooner | You are protected for longer |
| Fees | You may pay a product fee each time you take a new deal, so more often | Fewer new deals, so fewer fees |
| If your plans change | The early repayment charge period is shorter | A charge can apply for the full five years |
You can see lenders' published rates for each length on the 2 year fixed and 5 year fixed pages. Nobody can tell you where rates will be when a deal ends. A qualified, regulated mortgage adviser can look at your plans and recommend a length for you.
What is a tracker mortgage?
A tracker mortgage has a rate that follows another interest rate, almost always the Bank of England base rate, plus a set margin. The Financial Conduct Authority (FCA) describes trackers as linked to an external interest rate that can change. When the tracked rate moves, your rate moves by the same amount, and your payment changes with it.
MoneyHelper says tracker rates usually last two to five years, although some can last for the whole life of the mortgage. Some tracker deals carry an early repayment charge and some do not, so the terms of the deal decide whether you can leave without one. Some tracker deals also set a lowest rate, sometimes called a collar or floor, below which the rate will not fall; where one applies, it is set out in the mortgage offer.
The tracker rates page shows what lenders publish, and the rates news page records changes to the base rate and to lenders' rates.
Discount and standard variable rate mortgages
Standard variable rate
The standard variable rate, or SVR, is the lender's own rate for its standard mortgage. Each lender sets its own SVR and can change it. The Bank of England says lenders usually raise what they charge on loans when Bank Rate rises and cut it when Bank Rate falls, but an SVR is not tied to Bank Rate, and the lender decides each change. MoneyHelper says an SVR is usually higher than the lender's other mortgage rates. Most borrowers meet the SVR when a deal ends rather than choosing it at the start.
Discount variable mortgage
A discount mortgage charges the lender's SVR less a set discount, for a set time, which MoneyHelper says is usually two to three years. Because it hangs from the SVR, your rate changes whenever the lender changes its SVR.
A bigger discount does not always mean a lower rate. A large discount from a high SVR can leave you paying more than a small discount from a low one, so compare the rate you would pay, not the size of the discount.
What is an offset mortgage?
An offset mortgage links your mortgage to a savings account, and sometimes a current account, with the same lender. You pay interest only on the mortgage balance less the money in the linked accounts. With a £200,000 mortgage and £20,000 in linked savings, interest is charged on £180,000.
Your savings stay yours, but MoneyHelper says the linked savings account usually earns no interest: the gain is the lower interest on the mortgage. It also lists limited access to discounted rate deals as a drawback of offsetting. Whether offsetting leaves you better off depends on the rates and on how much you keep in savings, which a regulated adviser can work through with you. The guide to the offset mortgage works through the sums and the trade-offs.
Repayment mortgage or interest only
This is the second choice, and it sits alongside the rate type. All the types of mortgage above can, in principle, be repaid either way. You can have a fixed rate repayment mortgage or a tracker interest only mortgage, for example.
- Repayment mortgage. Each monthly payment covers the interest and pays back part of the loan. MoneyHelper says that, as long as you keep up the payments, the mortgage is repaid in full by the end of the term. This is the most common kind for people buying a home to live in.
- Interest only mortgage. Each payment covers the interest alone. The amount you borrowed does not go down, and you must repay all of it at the end of the term from a repayment plan, such as savings or investments. MoneyHelper says very few are now offered to people buying their own home.
The interest only mortgage guide explains the rules, and the mortgage calculator shows the monthly payment on a repayment mortgage for a price, deposit and term you choose.
Fixed or tracker mortgage: how they differ
Of all the types of mortgage, these are the two that buyers most often weigh against each other. The facts below are the same for everyone; how they weigh up is personal.
| Fixed rate | Tracker | |
|---|---|---|
| Monthly payment | The same throughout the deal | Rises and falls with the tracked rate |
| If the base rate falls | No change | Your rate falls |
| If the base rate rises | No change | Your rate rises |
| Budgeting | Easier, because the payment is known | You need room in your budget for a higher payment |
| Leaving early | Usually an early repayment charge | Depends on the deal; some have no charge |
Under the FCA's rules a lender must check that you could still meet the payments if interest rates rose, unless the rate is fixed for five years or more. The mortgage affordability guide explains that check.
How to compare mortgages
The headline rate is one part of the cost. Two deals with the same rate can cost very different amounts once fees are counted. Look at five things.
- The rate, and how long it lasts. Note the initial rate, the length of the deal and the rate the loan reverts to afterwards.
- The fees. A product or arrangement fee can be paid upfront or added to the loan, where it earns interest. A lower rate with a high fee is not always cheaper overall. The mortgage fees guide lists each one.
- The APRC. The annual percentage rate of charge shows the yearly cost of the mortgage over its whole term, with the fees built in. The mortgage illustration states it, with a note required by the FCA's rules that it is provided to help you compare different offers. It is worked out as if you kept the mortgage for the full term, with the rate after the deal ends counted for the remaining years, so it says less about the cost to a borrower who expects to switch when the deal ends.
- Early repayment charges. MoneyHelper says these are usually worked out as 1% to 5% of the outstanding balance, although some deals have a flat charge. The illustration shows how long they apply and how much you may overpay each year without one.
- Incentives. Cashback, a free valuation or help with legal fees have a value. A deal with an incentive may carry a higher rate or fee than one without, which is why the total cost is the fairer comparison.
The mortgage rates comparison works out the monthly payment, the payment after the deal ends, the APRC and the cost over the deal period for each published rate, so you can line deals up on the same basis.
Types of mortgage for a new-build home
There is no separate type of mortgage for a new build. You choose from the same rate types, on an ordinary residential mortgage. Three things differ in practice.
- Timing. You may reserve a home months before it is finished. A mortgage offer lasts for a set period, which the FCA says is generally between three and six months depending on the lender. If the build runs past it, you may need an extension or a new application, and the rate on offer by then may be different.
- Lenders' new-build rules. Lenders set their own criteria for new-build homes, including the largest share of the price they will lend, so not every published deal is open to every plot. The new-build rates page and the new-build mortgages guide explain more.
- Incentives. A builder's incentive is disclosed to your lender and can change how much it will lend. See the incentives guide.
Other terms you may see
A few more labels turn up beside the main types of mortgage.
- Capped rate. A variable rate with a ceiling it cannot rise above for a set period. Not every lender offers one.
- Cashback mortgage. The lender pays you a sum when the mortgage completes. The rate or fee may be higher than on a deal without it.
- Guarantor or family-assisted mortgage. A relative supports the loan with their income, savings or home. See the guarantor mortgage guide.
- Home purchase plan. A way to buy without an interest-bearing loan: the provider buys the home and you buy it from the provider over time. Home purchase plans are regulated by the FCA.
- Product transfer. A new deal with your existing lender, as opposed to a remortgage to a new one. See the remortgaging guide.
Questions people ask
What are the different types of mortgage terms?
The mortgage term is the total time you have to repay the loan, which MoneyHelper says is usually 25 years. The deal period is shorter: MoneyHelper says a fixed rate usually lasts between two and ten years and a tracker usually two to five, after which the loan moves to the reversion rate unless you take a new deal.
What is a repayment mortgage?
A repayment mortgage is one where each monthly payment covers the interest and pays back part of the loan. If you keep up the payments, the whole mortgage is repaid by the end of the term.
Is a 2 or 5 year fixed mortgage right for me?
It depends on your plans. A two-year fix lets you move to a new rate sooner but means paying fees for a new deal more often; a five-year fix gives certainty for longer but can carry an early repayment charge for the full five years. A qualified, regulated mortgage adviser can recommend a length for your circumstances.
Fixed or tracker mortgage: what is the difference?
A fixed rate stays the same for the deal period, so your payment does not change. A tracker follows another rate, usually the Bank of England base rate, plus a set margin, so your payment rises and falls when that rate moves.
What is an offset mortgage?
An offset mortgage links your savings to your mortgage, and you pay interest only on the loan less the savings. MoneyHelper says the linked savings usually earn no interest, and lists limited access to discounted rate deals as a drawback.
What are the main types of mortgage in the UK?
By how the rate is set, the main types are fixed rate, tracker, discount and standard variable rate mortgages, and an offset feature can be added to some of them. By how the loan is repaid, a mortgage is either repayment or interest only.
What is the difference between a tracker and a discount mortgage?
A tracker follows an outside rate, usually the Bank of England base rate, plus a set margin, so it changes only when that rate changes. A discount mortgage is priced at a set amount below the standard variable rate of the lender, so it changes whenever the lender changes that rate.
What happens when a fixed rate or tracker deal ends?
The loan moves to the lender's reversion rate, which is often its standard variable rate and is normally higher than the rate on the deal. You can usually arrange a new deal before that date, with the same lender or a different one.
Sources
- MoneyHelper: Understanding mortgages and interest ratesmoneyhelper.org.uk
- MoneyHelper: Interest only and repayment mortgages explainedmoneyhelper.org.uk
- MoneyHelper: Mortgage fees and costs when buying or selling a homemoneyhelper.org.uk
- FCA: Support available for mortgages as interest rates risefca.org.uk
- Bank of England: What are interest rates?bankofengland.co.uk
- FCA: Annual Percentage Rate of Charge (APRC) calculationsfca.org.uk
- FCA Handbook: MCOB sourcebook in full (PDF), including MCOB 10A on the APRC and MCOB 11.6 on affordabilityapi-handbook.fca.org.uk
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