When choosing a mortgage, interest rates and fees aren’t the only factors that you need to be aware of.
There are two main types of mortgages – fixed rate and variable rate. Fixed rate means the interest you’re charged stays the same for a set number of years. Variable rate means the interest on your mortgage can change.
Fixed rate mortgages
Usually, these mortgages are advertised as ‘X-year fix’ alongside the interest rate. During this period, the interest rate you’ll pay will stay the same, meaning your monthly payments will also stay the same.
- Fixed rate mortgages usually have a slightly higher interest rate compared to variable rates.
- You’re tied into the deal for a set period so if you want to leave early, you could be faced with charges.
- It’s a good idea to search for a new mortgage deal before your fixed rate deal ends or you’ll be moved onto your lender’s standard variable rate mortgage, which is often higher.
Variable rate mortgages
If you have a variable rate mortgage, the interest rate can change at any time, so it’s important to make sure you’ve got enough money set aside so you can afford repayments if they rise.
Standard variable rate mortgages (SVR)
This is the standard interest rate your mortgage provider will charge and is affected by the base rate set by the Bank of England. If the base rate rises, your interest rate may also rise. But if the base rate falls, the interest rate of your mortgage may also fall.
This type of mortgage also allows you to overpay and leave at any moment.
Some lenders offer a discount on a standard variable rate (SVR) but it only applies for a set amount of time. Standard variable rates are different across lenders so it’s important to not just pick the one with the biggest discount. This interest rate is also affected by the Bank of England base rate.
These mortgages move in line with another interest rate like the Bank of England’s base rate plus as a few percent.
Capped rate mortgages
With a capped rate mortgage, your interest rate will move alongside the lender’s SVR but the cap means it can’t rise above a certain rate. While the interest rate is usually higher than other variable and fixed rates, this mortgage does provide you with a level of certainty.
Offset mortgages link your current account and savings to your mortgage so that you’ll only pay interest on the difference. You’ll still repay your mortgage every month but your savings will act as an overpayment, meaning you can clear your mortgage quickly.
Important things to consider…
When comparing mortgages, don’t forget to look at fees, charges and exit penalties. It’s important to compare the market and do your research before choosing a mortgage.