When you're choosing a mortgage, deciding which type of deal to go for is a key decision, 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). Two and five-year deal periods are the most common.
- For expert, impartial advice on the best type of mortgage for your circumstances, call Which? Mortgage Advisers free on 0808 252 7987
Below, you can find out how each mortgage type works, then you can 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 0.5%) – for example, you might pay the base rate plus 3% (3.5%).
In the current mortgage market, you'd typically take out a tracker mortgage with an introductory-deal period. 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.
Find out more: Fixed-rate mortgages
Standard variable 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 at the start of April 2018 was 4.99% 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.
Also, lenders can change their SVR at any time, so if you're currently on an SVR mortgage, your payments could potentially go up (it's unlikely a lender would decrease its SVR in the current mortgage market).
If you're still in the initial deal period of your mortgage, make a note of when it's due to end, and consider remortgaging at that point to avoid being moved on to your lender's SVR and paying more than you need to.
Find out more: Standard-variable-rate mortgages
Pros and cons of fixed-rate mortgages, tracker mortgages and discount mortgages
Understand the advantages and disadvantages of different mortgage types so you can choose the best product type for you.
Once you've weighed up your options, Which? Mortgage Advisers can advise on the best deal for your personal circumstances – call 0808 252 7987 for a free consultation.
|Pros and cons of different mortgage types|
|Pros||Cons||Average interest rate for this mortgage type|
|Fixed-rate mortgages|| |
Pros of fixed-rate mortgages
Cons of fixed-rate mortgages
|Tracker mortgages|| |
Pros of tracker mortgages
Cons of tracker mortgages
|Discount mortgages|| |
Pros of discount mortgages
Cons of discount mortgages
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.
Interest-only and repayment mortgages
With an interest-only mortgage, you just pay interest on your mortgage, while with a repayment mortgage, you also pay off the the money you borrowed.
Interest-only mortgage repayments will be cheaper, but you will not have paid off any of the capital at the end of your mortgage term.
It is very unusual to get an interest-only mortgage in the current mortgage market.
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.
Alternatively, current account mortgages combine your current account, savings and mortgage into one, so all your credit balances offset your mortgage debt.
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.