Choosing the right type of mortgage could save you thousands of pounds, so it's really important to understand how they work.
After taking out your mortgage you'll pay an initial interest rate for a set period of time. This rate can be fixed (guaranteed not to change) or variable (may increase or decrease).
What’s the best type of mortgage for you?
Which? Mortgage Advisers can explain your options and find you the best deal.
Below, you can find out how each mortgage type works, then compare the pros and cons of fixed-rate, tracker and discount mortgages in our table.
There are two main types of variable-rate mortgage: tracker mortgages and discount mortgages.
With a tracker mortgage, your interest rate 'tracks' the Bank of England base rate (currently 0.75%) – for example, you might pay the base rate plus 3% (3.75%).
In the current mortgage market, you'd typically take out a tracker mortgage with an introductory deal period (for example, two years). After this, you are moved on to your lender's standard variable rate.
However, there are a small number of 'lifetime' trackers where your mortgage rate will track the Bank of England base rate for the entire mortgage term.
- Find out more: tracker mortgages
With a discount mortgage, you pay the lender's standard variable rate (a rate chosen by the lender that doesn't change very often), with a fixed amount discounted. For example, if your lender's standard variable rate was 4% and your mortgage came with a 1.5% discount, you'd pay 2.5%.
Discounted deals can be ‘stepped’; for example, you might take out a three-year deal but pay one rate for six months and then a higher rate for the remaining two-and-a-half years.
Some variable rates have a 'collar' – a rate below which they can’t fall – or are capped at a rate that they can’t go above. Make sure to look out for these features when choosing your deal to ensure you understand what you're signing up to.
- Find out more: discount mortgages
With fixed-rate mortgages, you pay the same interest rate for the entire deal period, regardless of interest rate changes elsewhere.
Two- and five-year deal periods are the most common, and when you reach the end of your fixed term you'll usually be moved on to your lender's standard variable rate (SVR).
Whether you should choose a fixed or variable-rate deal depends on whether you think your income is likely to change, whether you prefer to know exactly what you will be paying each month and whether you could cope if your monthly payments went up.
- Find out more: fixed-rate mortgages
Each lender has its own standard variable rate (SVR) that it can set at whatever level it wants – meaning that it's not directly linked to the Bank of England base rate.
The average SVR in July 2018 was 4.72%, according to Moneyfacts. This is higher than most mortgage deals currently on the market, so if you're currently on an SVR, it's worth shopping around for a new mortgage.
Lenders can change their SVR at any time, so if you're currently on an SVR mortgage, your payments could potentially go up - especially if there are rumours of the Bank of England base rate increasing in the near future.
- Find out more: standard-variable-rate mortgages
Pros and cons of fixed-rate mortgages, tracker mortgages and discount mortgages
|Pros and cons of different mortgage types|
|Fixed-rate mortgages|| |
Pros of fixed-rate mortgages
During the deal period, your interest rate won't rise, regardless of what's happening to the wider market.
A good option for those on a tight budget who want the stability of a fixed monthly payment.
Cons of fixed-rate mortgages
If interest rates in the mortgage market go down, you may end up paying more than you would on a variable-rate deal.
|Tracker mortgages|| |
Pros of tracker mortgages
If the base rate goes down, your monthly repayments will drop too (although this is unlikely to happen in the current market).
Your interest rate is only affected by changes in the Bank of England base rate, not changes to your lender's SVR.
Cons of tracker mortgages
You won't know for certain how much your repayments are going to be throughout the deal period.
|Discount mortgages|| |
Pros of discount mortgages
Your rate will remain below your lender's SVR for the duration of the deal.
When SVRs are low, your discount mortgage could have a very cheap rate of interest.
Cons of discount mortgages
Your lender could change their SVR at any time, so your repayments could become more expensive.
*Average rates according to Moneyfacts. Data sourced 13 November 2018
Whether you should go for a fixed or variable-rate mortgage will depend on whether:
- You think your income is likely to change
- You prefer to know exactly what you'll be paying each month
- You could manage if your monthly payments went up
Interest-only and repayment mortgages
When you take out a mortgage it will either be an interest-free or repayment mortgage, although occasionally people can have a combination.
With an interest-only mortgage, you just pay the interest each month, meaning you have to pay off the entire loan at the end of the mortgage term.
With a repayment mortgage, which is by far the more common type of mortgage, you'll pay off a bit of the loan as well as some interest as part of each monthly payment.
- Find out more: interest-only vs repayment mortgages
Mortgage features to look out for
Flexible mortgages let you over and underpay, take payment holidays and make lump-sum withdrawals. This means you could pay your mortgage off early and save on interest.
You don't normally have to have a special mortgage to overpay, though; many 'normal' deals will also allow you to pay off extra, up to a certain amount – typically up to 10% each year.
Other types of flexible mortgages include offset mortgages, where your savings are used to offset the amount of your mortgage you pay interest on each month.
Flexible deals can be more expensive than conventional ones, so make sure you will actually use their features before taking one out.
Cash back mortgages
Some mortgage deals give you cash back when you take them out.
But while the costs of moving can make a wad of cash sound extremely appealing, these deals aren't always the cheapest once you've factored in fees and interest. Make sure you take the total cost into account before choosing a deal.
Correct as of date of publication.