Definitions of types of mortgages available

Fixed Rate

This means that your mortgage payments will not change regardless of what happens to interest rates or the Bank of England base rate. This is best for those that like stability.

Tracker

This product will follow the Bank of England base rate. For example if the base rate is 5.25% (as at November 2023) and you have a 3% tracker then you will pay 8.25%.

However if the base rate changes so will your interest rate AND your monthly payment. People should think carefully about taking a tracker in current times as the bank of England base rate can only really go up.

Discount

This product is at a discount to the lender's SVR (Standard Variable Rate). For example if the lender's SVR is 4% and you have a 0.5% discount then you will pay 3.5%. However if the lender decides to change the SVR in line with business requirements or a change in the Bank of England base rate then  your interest rate AND your monthly payment will also change.

Both a tracker and a discounted scheme are for those that are willing to take a risk.

Capped

This is where you may be offered a tracker, discount or SVR scheme but the lender will set a ‘cap’. This is used when rates may rise and you can put a maximum on the rate you may pay. For example, a cap of 6% will mean that your rate will not go above 6% even if the lender's other schemes will. Until it reaches this cap the interest rate and monthly payments may change.

SVR

The SVR (Standard Variable Rate) was traditionally the lender's worst rate, and you will generally go onto this when your preferential scheme ends. At the moment the SVRs offered by lenders are quite low, but people should be aware that although other products may be more expensive in the short term. Should rates start to rise it may be difficult to remortgage, therefore it may pay to take advantage of a longer term fixed, or capped scheme, whilst rates are the lowest they have ever been!

Base Rate

This is the term commonly referred to the Bank Of England base rate. A graph reflecting the changes in the base rate over the years can be seen here.

We are currently experiencing the lowest interest rates in Britain’s history and it is a great time to look at a long term product if that best suits your situation. When rates are this low (currently 0.75%) they can only drop 0.75%, but they can go up an awful lot! Most people get confused and do not understand why they cannot get this interest rate, but this is because the banks do not borrow at the base rate but at LIBOR, which is generally higher.

LIBOR

Similar to tracker mortgages, LIBOR (London Interbank Offered Rate) linked mortgages reflect any changes in this rate, which is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks.

The LIBOR rate can change at any time, and therefore mortgage payments will change as a result, meaning that this type of mortgage is for those who are willing to take a risk.

Flexible

This is where you can overpay your mortgage on a monthly basis or by lump sum, have payment holidays, or draw back the funds you have overpaid. Most of these accounts also work on a daily interest basis and although normally at a higher rate to a standard mortgage, can more than offset any additional charges with the added features they offer.

Offset

If you have money sitting in your bank account or building society doing little for you and earning a meagre interest rate, then this could be the mortgage for you. By linking your savings accounts, current accounts and mortgage into one big pot you can significantly reduce the amount of interest you pay and  also reduce the mortgage term.