Securing your home and ensuring financial stability depends largely on your mortgage choice. In the UK, there are three types of mortgages: fixed-rate, tracker, and variable-rate. The first step to getting the right mortgage is to understand the differences between these mortgage types, as each has its own pros and cons and may or may not suit certain market conditions. You also need to understand your financial goals before choosing any mortgage from these types.
Continue scrolling and reading as we examine the differences between fixed, variable, and tracker mortgages.
Understanding the different mortgage types in the UK
In the UK, mortgages fall into two main categories: fixed-rate and variable-rate. Variable-rate mortgages are further divided into standard variable rate (SVR) and tracker mortgages. There is also a third variation known as a discounted variable mortgage.
A fixed-rate mortgage
In this type of mortgage, the interest rate is fixed for an agreed-upon period, known as the fixed term. This means your monthly payments remain constant, regardless of the base rate set by Bank of England (BoE). The base rate serves as the benchmark interest rate for borrowers.
A fixed-rate mortgage is appealing when interest rates are low. However, there may be high early repayment charges if you pay off the mortgage before the fixed term ends. After the fixed term, the repayment typically reverts to a standard variable rate (SVR), which is usually higher.
| Upsides | Downsides |
| Monthly payments remain fixed during the term.If interest rates are low, this can be an affordable optionEasier to budget due to consistent payments | High early repayment charges (ERC).Once the fixed term is over, the rate switches back to the SVR rate, which can be expensive. If interest rates drop during the fixed-rate period, your payments will remain unchanged. |
When is a fixed-rate mortgage a good idea?
Consider a fixed-rate mortgage if you are on a tight budget or if interest rates are low and you want to lock them in for a set period.
A Variable Mortgage
In a variable mortgage, the interest rate fluctuates, typically on a monthly basis. This means your payments can go up or down depending on market conditions. Due to the current instability in the UK economy, rate fluctuations are common, which makes it harder to budget. As a result, choosing a variable mortgage carries some risk.
The interest rate for variable mortgages is influenced by the Bank of England’s base rate and the overall economic climate. For instance, inflation may drive rates up, while economic downturns can lower rates to encourage spending.
Variable mortgages come in three types: tracker mortgages, standard variable rate (SVR) mortgages, and discounted variable mortgages.
- Standard Variable Rate (SVR) Mortgage
An SVR mortgage is based on a standard rate set by your lender. Typically, SVR rates are higher than those of tracker or fixed-rate mortgages, making it an expensive option. If the SVR increases, your monthly payments will rise, and if it decreases, your payments will fall.
Unlike tracker mortgages, the SVR isn’t strictly tied to the Bank of England’s base rate. Lenders can adjust the rate at their discretion, adding an element of unpredictability and risk.
| Upsides | Downsides |
| Rates may decrease if the Bank of England’s base rate drops.In most cases, there are no early repayment charges.The arrangement fees are usually lower than fixed-rate and tracker mortgages. | Compared to other mortgage types, SVR is an expensive option.The lender can increase the SVR at any given time. This makes it a risky option. |
When is choosing an SVR a good idea?
SVR is a flexible option, even though it is risky. You are likely to get a competitive deal with SVR. Even though a standard variable-rate mortgage has higher rates than other mortgage options, you do not have to pay an ERC, which is a big advantage. If you are anticipating changes in your life during the mortgage term, like relocating, planning a family, or moving out of your current home, then SVR is a good idea.
- Tracker Mortgage
A tracker mortgage is a kind of variable mortgage in which the interest rate is linked to the Bank of England’s base rate plus an agreed-upon percentage. For example, if the base rate is 4.75% and the tracker rate is 1% above it, your interest rate would be 5.75%. If the base rate drops to 4.50%, your rate will decrease to 5.50%.
This means that if the base rate increases, your payments will also increase. On the other hand, if the base rate decreases, you can save some money as payments will be less.
| Upsides | Downsides |
| The rate only increases when the Bank of England base rate rises, ensuring the lender can’t arbitrarily raise it. If the base rate decreases, your monthly payments will decrease accordingly. | If the base rate increases, your monthly repayment amount will increase as well.There may be penalties if you switch before the agreed term ends. |
- Discounted Variable Mortgage
A discounted variable mortgage provides a reduced interest rate compared to the lender’s standard variable rate (SVR). This discount usually applies for a limited time, often up to three years, though some lenders may extend it for a longer period.
| Upsides | Downsides |
| As long as there is a discount, the interest rate is below the SVR.When the base rate decreases, the interest rate also decreases.ERC exists but is usually less than fixed-rate mortgages. | If the base rate increases, the discounted rate also increases. If the lender’s SVR is high, then the discounted variable rate may not be as competitive. Since this is a form of variable-rate mortgage, budgeting remains a challenge. |
It is important to understand that SVRs vary between lenders. This means that a larger discount does not necessarily result in a lower interest rate. As a borrower, you should compare the SVR with the discounted rate before making a decision.
Which is the best mortgage choice for you – fixed, variable, or tracker?
You need to consider a few things to decide which is the best option for you. First, consider your current financial circumstances. Also, what is your personal choice – flexibility or certainty?
Consider the following factors while making the decision.
- Stability vs. Flexibility: Fixed-rate mortgages provide stability, which allows you to budget with certainty. Variable and tracker mortgages, on the other hand, fluctuate based on market conditions, which eventually offer more flexibility but less predictability.
- Interest Rate Trends: If rates are expected to rise, a fixed-rate mortgage is the right choice. If rates are anticipated to fall, tracker or variable mortgages are better choices.
- Financial Considerations: If you are working on a tight budget, choose a fixed-rate mortgage. Variable and tracker mortgages offer more flexibility to address rate hikes.
- Early Repayment Charges (ERCs): The ERC is often higher in fixed-rate mortgages, while it is generally zero or low in variable and tracker mortgages.
Make the Right Mortgage Choice with Cangaf Accountants
Choosing between a fixed, variable, or tracker rate mortgage is difficult but based mostly on your financial conditions, goals, and risk-bearing ability. The decision also depends on the conditions of the economy. Since all the mortgage types have their pros and cons, it is important to analyze them comprehensively before making a decision. If you are facing problems choosing the right mortgage, speak with Cangaf Accountants for one-to-one guidance and make informed decisions.
Understanding Mortgage Support from the Government
If you’re wondering what financial help is available for homebuyers, this official UK government page explains different support options. It covers things like mortgage assistance and schemes that might help you afford your home.
👉 Mortgage Charter – GOV.UK
Affordable Home Ownership Schemes
If you’re a first-time buyer or struggling to get on the property ladder, there are government-backed schemes that can make buying a home more achievable. This page explains options like shared ownership and Help to Buy.
👉 Affordable Home Ownership – GOV.UK
Checking Interest Rates for Your Mortgage
Mortgage rates change all the time, and it’s important to stay updated on them, especially if you’re considering a tracker or variable rate mortgage. This page provides the latest interest rates so you can make informed decisions.
👉 Current Interest Rates – UK Debt Management Office
