Fixed, Variable, Tracker, Offset, Discounted rate mortgage | Explained

Podcast: Let’s Talk Money and Mortgages

Host: Gemma

Guest: Ifthi – Trained Accountant, Mortgage Advisor, and Founding Director at WIS

Topic: Exploring fixed and variable mortgages and which options may be right for you

Q1: What are the main types of mortgages?

Answer:

There are two main types of mortgages:

• Fixed-rate mortgages
• Variable-rate mortgages

While there are categories under these, most mortgages fall into one of these two groups.

Q2: What is a fixed-rate mortgage?

Answer:

A fixed-rate mortgage has a set interest rate for a specific term, e.g., 2, 3, 5, 7, or 10 years.

You know exactly how much you will pay each month, which helps with budgeting.

Example: If your mortgage is £1,000/month at a 3% fixed rate for five years, it will remain £1,000/month for that term.

Benefits:

• Provides peace of mind and predictable monthly payments.
• Ideal when interest rates are expected to rise, protecting you from increases.

Disadvantages:

• If interest rates fall, you do not benefit from lower rates.
• Most fixed mortgages have an early repayment charge, which applies if you sell your house or repay early.

Q3: What is a variable-rate mortgage?

Answer:

Variable-rate mortgages have interest rates that can change over time.

The rate is usually linked to a reference rate, such as the Bank of England base rate or the bank’s standard variable rate (SVR).

Monthly payments can increase or decrease depending on interest rate changes.

Categories of variable-rate mortgages:

• Tracker Mortgages
• Discount Mortgages
• Standard Variable Rate (SVR)

Q4: What is a tracker mortgage?

Answer:

A tracker mortgage tracks the Bank of England base rate.

Example: If the base rate is 1.25% and your mortgage is 1% above it, your rate is 2.25%.

If the base rate rises to 1.5%, your mortgage rises to 2.5%.

Advantages:

• Often no early repayment charges (depending on the deal).
• May be cheaper than fixed rates in the short term (currently about 1% less than fixed rates).

Disadvantages:

• You have no control over monthly payments if the base rate increases.
• If you switch to a fixed rate later, you may face higher fees.

Q5: What is a discount mortgage?

Answer:

A discount mortgage provides a reduction on the bank’s standard variable rate (SVR), not the Bank of England rate.

Example: SVR is 5%, and the discount is 3%, so you pay 2%. If SVR rises to 5.5%, you pay 2.5%.

Advantages:

• Often cheaper than tracker mortgages in the current market.
• Can save money in the short term if you are willing to take a risk.

Disadvantages:

• Usually includes early repayment charges.
• Interest rate is controlled by the bank, not the Bank of England.
• Mostly offered by smaller banks or building societies, which may have stricter processes and slower applications.

Q6: What is a standard variable rate (SVR) mortgage?

Answer:

The SVR is the default rate a bank charges when no deal is in place.

Example: After a fixed or discounted deal ends, the mortgage often reverts to the SVR.

SVR usually changes in line with interest rates, but it is controlled by the bank.

Q7: What are the advantages of tracker mortgages?

Answer:

Trackers often have no early repayment charges, offering flexibility.

Can be cheaper than fixed-rate deals in the current market.

Flexible for those planning to move or remortgage within a short term.

Q8: What are the disadvantages of tracker mortgages?

Answer:

Monthly payments can increase if the Bank of England base rate rises.

Less predictable for long-term budgeting compared to fixed-rate mortgages.

Q9: What are the advantages of discount mortgages?

Answer:

Can be cheaper than tracker or fixed-rate mortgages in the short term.

Allows borrowers to benefit from lower rates now, if willing to take a risk.

Q10: What are the disadvantages of discount mortgages?

Answer:

Often include early repayment charges if you sell or repay early.

Rate is controlled by the bank, not the Bank of England, so it can rise unexpectedly.

Typically offered by smaller banks or building societies, which may have slower application processes.

Q11: How do I choose the right mortgage?

Answer:

There is no one-size-fits-all mortgage.

Tracker, discount, and fixed-rate mortgages all have pros and cons.

The right choice depends on:

• Your budget flexibility
• How long you plan to stay in the property
• Your risk tolerance for interest rate changes

Always seek advice from a qualified mortgage advisor before committing.

Key Takeaways

Fixed-rate mortgages offer stability and predictable payments.

Tracker mortgages follow the Bank of England base rate and can offer short-term savings and flexibility.

Discount mortgages reduce the bank’s SVR, potentially cheaper now but may carry early repayment penalties.

Standard Variable Rate (SVR) is the default bank rate after any deal ends.

Seek advice to match your mortgage type to your personal circumstances.

Contact WIS:

Phone: 0203 01968

Website:https://wismortgages.co.uk/

Reminder: Your mortgage is secured against your home or property. Failure to keep up with repayments may result in repossession.