Mortgage interest rate types explained

A guide explaining the differences between Fixed, Tracker, Standard Variable and Discount mortgage interest rates.

The four interest rate types mentioned above can be divided into two categories, fixed and variable. As the name suggests, a fixed rate product offers an interest rate that does not change and conversely, a variable product provides an interest rate that can vary. The four interest rate types commonly available are outlined below:

  • Fixed Rate Mortgages: A fixed rate product guarantees your interest rate for a set period of time. The product term (note, not the same as mortgage term) can be anywhere from 2-15 years. Fixed rates offer the financial security of set monthly payments, however early repayment charges may apply if you wish to change or repay your mortgage during the initial period. It is important therefore, to consider any potential future changes to your circumstances & requirements before locking in to a long term fixed rate.

  • Standard Variable Rate (SVR): The SVR is a lender's core interest rate, and is applicable to all loans not linked to a specific mortgage product. Standard variable rates can and will be varied according to changes in the banks requirements, funding costs and statistical default data. Monthly payments can vary, however often no early repayment charges apply, offering high levels of flexibility.

  • Discount Rate: A Discount (to SVR) is a mortgage product which offers a discount to the SVR for a set time period (typically 2-5 years). For example, if a lender's standard variable rate is 4.99%, they may offer a discount of 1.5% for two years. Monthly payments will vary according to changes to the underlying SVR.

  • Tracker Rate:A Tracker is variable rate mortgage product linked to the Bank of England (BoE) base rate. Rates are typically offered at the base rate plus a fixed percentage, for example, BoE base rate plus 1.5%. If the base rate is 0.5%, this would givee an interest rate of 2.0%. Tracker interest rates can only be varied if the BoE base rate is varied, therefore offer a greater level of security than Standard Variable or Discount loans, however monthly payments can still alter.

Usually, unless you opt for a lifetime product, your chosen interest rate type will apply for a set time after which the loan will revert to the lender's Standard Variable Rate. At that time it is sensible to re-evaulate your options.

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