Understanding UK Mortgage Types: Fixed, Tracker and Variable Explained
Understanding UK Mortgage Types: Fixed, Tracker and Variable Explained
The type of mortgage you choose decides how your interest rate behaves: whether it stays put, follows the Bank of England, or moves at your lender's discretion. That affects your monthly payment and the total you repay, so it deserves as much thought as the property itself. Here are the main options UK lenders offer.
Fixed rate mortgages
A fixed rate keeps your interest rate the same for an agreed period, most often two or five years. Three-year and ten-year fixes exist too. Your monthly payment stays the same for that period whatever happens to rates elsewhere.
This is why most first-time buyers fix. You know what's leaving your account each month, and a rise in the base rate won't touch you until the deal ends.
The cost of that certainty is flexibility. If rates fall, you stay on the rate you agreed. Leaving early, whether to switch deals or to sell without taking the mortgage with you, usually triggers an early repayment charge (ERC). These are typically 1% to 5% of the outstanding balance, often stepping down each year. On a £200,000 balance, a 3% charge is £6,000. Most fixes do let you overpay up to 10% of the balance a year without a charge, but check your own terms.
When the fixed period ends, the lender moves you to its standard variable rate unless you arrange a new deal. Most people remortgage at that point.
Tracker mortgages
A tracker rate follows a benchmark, almost always the Bank of England base rate, plus a fixed margin. A deal priced at base rate plus 0.75% would charge 4.75% if the base rate were 4%. When the Bank's Monetary Policy Committee changes the base rate, your rate moves by the same amount, usually within a few weeks.
Trackers suit borrowers who expect rates to fall, or who want the freedom to leave. Many come with no ERCs, which helps if you might sell or move lender within a year or two. Lifetime trackers, which run for the whole term, are also available from some lenders.
Your payment can rise as easily as it falls. On a £200,000 loan over 25 years, a rate going from 4% to 5% adds about £114 a month. If that would stretch your budget, a tracker carries more risk than you may want. Some trackers also have a "collar", a floor below which the rate won't drop even if the base rate does, so read the terms.
Standard variable rate (SVR)
Every lender has an SVR. It's the rate you move to when your deal ends. The lender sets it and can change it when it chooses. It tends to follow the base rate, but it isn't tied to it. SVRs are usually among the most expensive rates a lender charges, and few people choose one on purpose.
One advantage: SVRs normally have no early repayment charges, so you can leave at any time. If you're on one now, compare the cost of switching using our [mortgage calculator](/mortgage-calculator). Even after fees, the saving is often hundreds of pounds a year.
Discount mortgages
A discount mortgage gives you a set reduction off the lender's SVR for a fixed period, for example SVR minus 1.5% for two years. Because the lender controls the SVR, your rate can change even when the base rate doesn't. That makes discount deals less predictable than trackers. They are now far less common than fixed and tracker products.
Offset mortgages
An offset mortgage links your savings to your mortgage. Instead of earning interest, your savings reduce the balance you're charged interest on. With a £200,000 mortgage and £30,000 in the linked account, you pay interest on £170,000.
At a 4.5% mortgage rate, that £30,000 saves about £1,350 in interest a year, and the saving isn't taxed because it isn't income. A higher-rate taxpayer whose savings interest is already above their £500 personal savings allowance would need a savings account paying 7.5% to match that after tax. That's why offsets suit higher and additional-rate taxpayers with large cash balances. You can still withdraw the savings when you need them.
The catch is the rate. Offset deals usually cost a little more than a standard mortgage, so with only a small savings balance you can end up worse off.
How to choose
Start with how much a payment rise would hurt. If an extra £100 or £200 a month would cause problems, a fixed rate is the sensible default. If you have room in your budget, think rates are more likely to fall, or may need to move within two years, a tracker with no ERCs is worth comparing. If you keep a large savings buffer and pay higher-rate tax, look at offset deals alongside the rest.
Run each option through our [mortgage calculator](/mortgage-calculator) at today's rate and at a rate one or two percentage points higher. A whole-of-market broker can then search lenders for the type you've settled on. Ask whether they charge a fee on top of the commission the lender pays them.