What do different mortgages mean?

Melanie Wright
Written by: Melanie Wright
Posted on: 26 November 2015

If you're a first-time buyer, the huge range of mortgages on offer can seem pretty daunting.

Should you go for a fixed or variable rate deal, or could an offset mortgage save you cash?

Getting the right deal can save you hundreds, if not thousands, of pounds a year, so it's vital to get to grips with all the jargon you're likely to come up against before you apply.

Here's what you need to know about the various different types of home loan to help you find your way around the mortgage maze...

Fixed rate mortgages

With a fixed rate mortgage, the rate can't move up or down during the term of the deal. So, if you opt for a two-year fixed rate deal, say at 2.99%, you'll know that this rate won't change for the first two years.

That certainty can be really useful, as you know your payments will remain the same, making it easier to budget.

You'll usually be locked in for the fixed rate period and there will be penalties if you want to leave early, but once this period is over, you'll be free to move to a different deal if you want to.

When your fixed rate ends, the rate you are on will become variable and can move up and down over time, which means your payments can change too.

Tracker mortgages

Tracker mortgages, as the name suggests, track or follow the Bank of England base rate, plus a set percentage.

So, if the base rate is at 0.5%, you might, for example, find a deal which tracks the base rate plus another 1.75%, which makes the rate you'll pay 2.25% (1.75% plus 0.5%).

If you think the Bank of England isn't going to raise interest rates for some time to come, then a tracker mortgage might look appealing.

But if you're worried that rates could rise soon, you may have greater peace of mind opting for a fixed rate deal.

Interest rates statement

Interest rates statement

Discount mortgages

When you choose a discounted mortgage, the lender will usually be offering a discount off their standard variable rate for a set period of time.

The standard variable rate is a rate determined by lenders and can go up and down whenever they decide.

For example, the lender you're interested in might have a 4.9% standard variable rate, and offer a discount of 2.5% for two years, which means you'd pay a rate of 2.4% during the discounted period.

Once the discount ends, you'd then go back onto the variable rate of 4.9% (or more or less if rates have changed over time) unless you move to a different deal.

Capped rate mortgages

If you choose a capped rate deal, your mortgage rate can go up or down over time, but will never exceed a certain limit.

There will usually be an early repayment charge if you pay off the mortgage during the capped rate period.

Don't be tempted to take out a mortgage based on the rate alone

Offset mortgages

An offset mortgage is only likely to be the right choice for you if you've got a large amount of savings stashed away.

That's because with this type of mortgage, any savings you have are offset against the amount you borrow, reducing the amount of interest you pay.

Imagine you are taking out a £150,000 mortgage, and you've got £30,000 in savings. If you went for an offset mortgage, the lender would deduct the £30,000 in savings from your mortgage amount, so you'd only have to pay interest on £120,000 (£150,000 less the £30,000).

What's good about this type of deal is that you still have access to your £30,000 of savings, so you can get your hands on it when you want.

The downside is that offset mortgage rates tend to be a little higher than those offered by other types of mortgage.


Whichever type of mortgage you go for, you'll end up with a wider choice of deals the bigger the deposit you can afford to put down.

Don't be tempted to take out a mortgage based on the rate alone. Check what the arrangement fees are before proceeding, as these can substantially bump up overall costs.

A deal with a higher rate but lower arrangement fee may prove more cost-effective than a very low rate with a steep fee.

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