Standard Variable Rate
The standard variable rate is the normal rate charged by a bank or building society and because it is variable the interest rate can go up or down which will affect your monthly mortgage repayments.
There are generally no early repayment charges to be made if you decide to repay part or of your mortgage early. However there is normally a fee payable on the final redemption of the mortgage.
A discounted rate mortgage offers a discount off the standard variable rate for the first few years of the mortgage. If you repay part of your mortgage within the discounted period you may have to pay an early repayment charge.
If the lender’s variable rate alters, your monthly mortgage repayments will also change, but you will still keep the discounted rate until the end of the discounted rate period after which the rate will revert to the lender’s standard variable rate.
With a fixed rate mortgage your monthly mortgage repayments are fixed for a set period and then revert to the lender’s standard variable rate at the end of the fixed rate period.
If the lender’s variable rate changes during your fixed rate period, your monthly mortgage repayments will remain the same until the end of the fixed rate period.
Tracker rate mortgages are directly linked to the Bank of England base rate and usually for the full term of the mortgage.
Some lenders however offer tracker rates for an initial 2 or 3 year period after which the rate would revert to the lender’s standard variable rate.
If the tracker rate is for the full term of the mortgage, the lender may charge an extra 1.5% or 2% above the Bank of England base rate for the full term of the loan.
Full-term tracker rate mortgages are the most cost-effective type of loans.
An offset mortgage gives borrowers more flexibility by offsetting their savings against their mortgage where your mortgage account and savings account are linked together.
For example if you have a mortgage of £100,000 and have £25,000 savings, then you will only pay interest on £75,000.
This type of mortgage however is more appropriate for higher rate tax payers or people with large savings.