If you're exploring mortgage options, you'll quickly come across terms such as fixed rates, tracker mortgages, discount mortgages and standard variable rates. While they all determine how much interest you'll pay on your mortgage, they work in different ways and can affect both your monthly payments and your financial planning. Mortgage rates generally fall into two broad categories: fixed rates, where the rate remains the same for a set period, and variable rates, where the rate can change. Tracker mortgages, discount mortgages and standard variable rates are all examples of variable rate mortgages, although they work in different ways. Understanding the differences can help you make a more informed decision when choosing a mortgage.
Standard Variable Rates (SVRs) mortgages
A Standard Variable Rate is the lender's default mortgage rate. Many borrowers move onto their lender's SVR when their initial fixed, tracker or discount deal comes to an end, unless they arrange another mortgage product. SVRs are variable, meaning the lender can increase or decrease the rate. They can be higher than rates available on other mortgage products, which is why many borrowers choose to review their options before reaching the end of their existing arrangement. That doesn't necessarily mean an SVR is unsuitable. Some borrowers value the flexibility that can come with certain variable rate products, particularly if there are no early repayment charges. However, monthly payments can change if the lender adjusts its rate.
Tracker mortgages
A tracker mortgage is linked to an external interest rate, usually the Bank of England base rate. The mortgage rate will typically be set at a certain percentage above the base rate. For example, if a tracker mortgage is set at 0.50% above the base rate and the base rate is 4%, the mortgage rate would be 4.50%. If the base rate increases, the mortgage rate and monthly payments are likely to increase. If the base rate falls, the mortgage rate and monthly payments may reduce. Tracker mortgages may appeal to borrowers who are comfortable with their monthly payments changing if interest rates move up or down.
Discount mortgages
A discount mortgage is another type of variable rate mortgage. Instead of tracking the Bank of England base rate, the rate is linked to the lender's Standard Variable Rate (SVR). The lender applies a discount to its SVR for a set period. For example, if a lender's SVR is 7% and the mortgage has a 2% discount, the borrower would pay 5%. While discount mortgages can sometimes offer competitive initial rates, the lender's SVR can change over time. This means the mortgage rate and monthly payments could go up or down during the discount period. Because the mortgage isn't directly linked to the Bank of England base rate, changes may not always mirror movements in the wider interest rate market.
Fixed rate mortgages
A fixed rate mortgage does exactly what the name suggests. Your interest rate is fixed for an agreed period, meaning your monthly mortgage payments will remain the same during that time, provided your mortgage balance and repayment method don't change. One of the main reasons borrowers might choose a fixed rate mortgage is certainty. Knowing exactly what your monthly payments will be can make budgeting easier and provide peace of mind, particularly during periods when interest rates are changing. Whether interest rates rise or fall, your mortgage rate stays the same until the fixed period ends.
At a glance
• SVR: The lender's default variable mortgage rate.
• Tracker: Follows the Bank of England base rate.
• Discount: A variable rate with a discount off the lender's SVR.
• Fixed: The rate stays the same for an agreed period.
So, which option is right for you?
There is no universal answer. The most suitable option will depend on your circumstances, future plans and attitude to risk. Some borrowers prefer the certainty of a fixed rate, knowing their payments will remain unchanged for a set period.
Others may be comfortable with their monthly payments changing over time. Some may also value the flexibility that can come with certain variable rate products, such as the ability to make overpayments or repay the mortgage early without incurring charges.
Making an informed choice
Choosing a mortgage isn't just about finding the lowest interest rate. It's also about understanding how different mortgage types work and choosing a product that aligns with your circumstances and future plans. A mortgage adviser can help explain the differences between available products and help you understand which options may be most appropriate for your individual circumstances.
If you would like to talk through your options, book a free appointment with us or call 08000 38 37 36.
This is for information only. Products and rates vary depending on your circumstances, lender criteria and products available at the time.
