By Matthew Horan CeMAP · Mortgages
Quick answer: A fixed-rate mortgage keeps your interest rate the same for a set period, so your payments are predictable. A tracker follows the Bank of England base rate, plus a set margin, so your payments can go up or down. A discount mortgage takes a reduction off the lender's standard variable rate, which the lender can change. Which suits you depends on how much certainty you want, what you can afford if rates change and any charges for leaving early. Clarity Mortgages & Protection in Altrincham gives fee-free advice, with no obligation.
When you look at mortgage deals, one of the first choices you face is the type of interest rate. The names can sound similar, but they work in different ways and carry different risks.
Here's a plain-English guide to each, with the pros and cons, so you know what to ask about.
Fixed-rate mortgages
With a fixed-rate mortgage, your interest rate stays the same for an agreed period, commonly two, three, five or sometimes ten years. Your monthly payment stays the same too, whatever happens to interest rates elsewhere.
The advantages
Your payments are predictable, which makes budgeting easier
You're protected if interest rates rise during the fixed period
It can give peace of mind, particularly if your budget is tight
The drawbacks
You won't benefit if rates fall
Leaving early, for example to move or switch, usually means an early repayment charge
The rate at the start can be higher or lower than other types, depending on the market
When the fixed period ends, you normally move to the lender's standard variable rate unless you arrange a new deal. Our post on what to do when your fixed rate ends explains your options.
Tracker mortgages
A tracker follows an external rate, most commonly the Bank of England base rate, plus a set margin. If the base rate goes up, your rate goes up by the same amount. If it goes down, your rate goes down.
The advantages
You benefit directly if the base rate falls
It's transparent, as you can see exactly how your rate is set
Some trackers have no or low early repayment charges, which gives flexibility
The drawbacks
Your payments can rise, and by more than you expect
It's harder to budget with confidence
You need a cushion in case rates go up
Discount (variable) mortgages
A discount mortgage gives you a reduction off the lender's standard variable rate (SVR) for a set period. Because the SVR is set by the lender, it can change at any time, and it doesn't have to follow the Bank of England base rate.
The advantages
The starting rate can be lower than the SVR
If the lender cuts its SVR, your rate falls too
The drawbacks
Your lender can raise the SVR whenever it chooses, so your payments can change
Because the lender controls the rate, there's less transparency than with a tracker
There may be early repayment charges
What happens when the deal ends?
Whichever type you choose, the special rate ends at some point. After that, most lenders move you onto their SVR, which is often higher. This is one of the biggest reasons people end up paying more than they need to. Putting a reminder in your diary around six months before your deal ends gives you time to arrange a new one. See When should you re-mortgage? for the moments that matter.
Which type suits you?
There's no universal right answer, but these questions help:
How tight is your budget? If an increase in payments would cause real difficulty, the certainty of a fixed rate can be valuable.
Do you have a cushion? If you could absorb higher payments, a variable rate might be an option.
How long do you expect to stay? If you might move or switch soon, the early repayment charges matter.
How do you feel about risk? Some people prefer certainty and don't mind missing out if rates fall. Others are happy to take the ups and downs.
What's available now? The best option changes with the market, so it's worth comparing current deals.
Fees matter too. A deal with a lower rate but a higher product fee isn't always cheaper overall. We compare the total cost over the period, not just the headline rate.
Don't forget protection
Whichever type you choose, your payments could change if your circumstances do. It's worth thinking about what would happen if you couldn't work. Read Life insurance, critical illness or income protection: which one protects your mortgage? for what to consider.
How a whole-of-market broker can help
A broker can compare fixed, tracker and discount deals from a wide range of lenders, show you the total cost of each and explain the risks in plain English. If you're not sure whether you need one, read Do you need a mortgage broker?
Frequently asked questions
What's the difference between a fixed and a tracker mortgage?
A fixed rate stays the same for an agreed period. A tracker follows the Bank of England base rate plus a margin, so it can go up or down.
Is a fixed or variable mortgage better?
It depends on your budget, your attitude to risk and what's available. A fixed rate gives certainty. A variable rate can be cheaper if rates fall but carries more risk.
What is a standard variable rate?
It's the rate a lender moves you onto when your deal ends, and it can change at any time. It's often higher than the deals available when you take out a mortgage.
Can I leave a fixed rate early?
You can, but you'll usually have to pay an early repayment charge. Check your terms before you decide.
How long should I fix for?
Common periods are two, three or five years. A longer fix gives more certainty for longer, but it can limit your flexibility. We'll talk through what suits your plans.
Does it cost anything to speak to you?
No. We don't charge a fee for our advice.
If you'd like help choosing the right type of mortgage, get in touch. It's fee-free with no obligation. We help clients across Altrincham, Trafford and Cheshire.
About the author
Matthew Horan CeMAP is Principal of Clarity Mortgages and Protection, an independent, fee-free mortgage and protection broker based in Altrincham. He has over 10 years' experience helping individuals, families and business owners with mortgages and protection, and writes in plain English because most people aren't given the chance to understand what they're signing.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.
This article is general information, not advice. What's right for you depends on your own circumstances. Acceptance of an application depends on the lender's criteria and is not guaranteed. Check the terms of any mortgage, including early repayment charges, before you commit.
