Fixed rate mortgage
With a fixed rate mortgage, the interest rate is fixed at a certain level for a specific period. During this time the rate will not change - even if other rates go up and down, so you will always know exactly what your repayments will be. At the end of the initial fixed rate period your loan will normally revert to the variable rate that applies at the time, and at this stage you should review whether a more competitive rate or more suitable product might be available by remortgaging to another lender.
If you choose a fixed rate mortgage, early repayment charges will apply.
Variable rate mortgage
A variable interest rate is one that that can vary by moving upwards or downwards, changing whenever the lender alters their lending rates. This will normally be in response to changes in Bank of England Base Rate (BBR).
During the lifetime of a mortgage there may be several interest rate movements - both upwards and downwards, which will increase or decrease the monthly mortgage payment due accordingly.
There are several types of variable rate mortgage:
- Standard variable rate (SVR) mortgage - this is a lender's basic mortgage rate that they often use to set their other schemes against.
- Discounted rate mortgage - a variable rate may be discounted by a certain amount for an initial period, lowering the rate charged and therefore reducing the monthly mortgage payment due during that time. At the end of the discounted period, the rate will normally revert to the variable rate that applies at the time. At this stage you should review whether a more competitive rate or more suitable product might be available by remortgaging to another lender. If you choose a discounted variable rate mortgage, early repayment charges will apply.
- Capped rate mortgage - a variable rate that is capped at a top level for a period of time. During this time the rate may go up and down, but will not exceed the cap. This gives you the security of knowing that, if rates go up, your monthly payment will not exceed a certain amount, but you will still get the benefit of it reducing if the interest rate goes down.
- Tracker rate mortgage - an interest rate that is linked to (but not necessarily equal to) another variable rate and fluctuates in line with its movements.
- It is usually linked to the Bank of England Base Rate (BBR), set a certain level above it, and then tracks BBR at that level for the duration of the loan.
- It may be linked to the London Inter-Bank Offered Rate (LIBOR), set a certain percentage above it, and then track LIBOR at that level for the duration of the loan.
- LIBOR linked mortgage - the mortgage is linked to the rate of interest at which national banks in different countries lend to each other, more specifically the London Inter-Bank Offered Rate (LIBOR). The mortgage interest rate is a set percentage above LIBOR, reviewed on a regular basis and will fluctuate in line with the movements in LIBOR.
