A fixed-rate mortgage is when the interest rate payable on your mortgage will be fixed for an agreed length of time. This is typically for two or three years, but you can find fixed rate mortgages for five or ten years. Variable rate mortgages have interest rates that can fluctuate.
When a fixed-rate term comes to an end, you’ll normally move to the bank’s standard variable rate (see below). These tend to be higher interest rates than those available on other products so it’s better to comparethemarket and search for a re-mortgage deal.
Variable rate mortgages include:
1. A standard variable rate mortgage (SVR) is a provider’s basic rate of interest. SVRs don’t come with discounts or reduced interest rates, and the provider can change the interest rate. This tends to be the rate you roll onto once a fixed deal is over.
2. Tracker mortgages have variable interest rates but they track an external rate, normally the Bank of England base rate, at a certain percentage above or below this rate. Tracker mortgages can track this external rate for a fixed term or can track for the entire mortgage term.
3. A discount rate mortgage tracks (at a lower level) a lender’s SVR by a set amount. For example, if the SVR is 4% and the discount is 1%, you’ll be charged an interest rate of 3%. Discount rate mortgages are still subject to change though as the SVR can move – it’s just the discount amount that is fixed – so if the SVR increases to 5%, you’ll pay 4%.
4. A capped mortgage is also linked to the lender’s SVR but it won’t go above a set level, while a collared mortgage is where the interest rate won’t fall below a set limit. These are much less common but do exist.