Fixed rate
Fixed rate mortgages have an interest rate that remains the same for a period of time – usually between 1 and 5 years. After this period the interest rate reverts to the lenders standard variable rate. The fixed rate is usually at a discount as an incentive to take out the mortgage. The advantage of fixed rate mortgages is that there are no surprises for the duration of the fixed rate. The downside to this type of mortgage occurs if the Bank of England base rate or libor rate falls, in which case you could end up paying more than you would have with a variable rate mortgage. Also, if you want to leave before the agreed term the early repayment charge is usually significant. For example, you may be charged six months gross interest if you leave a five-year fixed rate agreement.
Variable & Trackers
A variable rate mortgage is where the interest rate varies according to the Bank of England base rate or the libor rate. A lender’s variable rate is set above the base rate by usually by 1 – 2%. A tracker mortgage is usually set at a certain percentage above the Bank of England base rate.
With these types of mortgages, the upside is the same as the downside; the interest rate can go down, saving you money, or up, in which case your interest payments increase.
