Fixed Rate
As its name suggests, a fixed rate mortgage charges a fixed interest rate for a set period of time – usually two, three, four or five years. Once the fixed rate comes to an end your lender usually switches you on to their standard variable rate.
Pros
Your mortgage payments will be exactly the same every month until your deal expires. If your mortgage lender changes its other interest rates, for example those that track the base rate set by the Bank of England, your mortgage payments will stay unchanged.
Cons
Fixed rate mortgages may be more expensive than other types.
You won't benefit if interest rates go down, as your rate will stay unchanged.
They usually tie you in to early repayment charges during the fixed rate period.
The security of knowing your monthly repayments won’t change, allowing you to budget more easily. If you’re on a fixed rate mortgage and the fixed rate period ends, your lender will usually switch you on to their standard variable rate. Standard variable rates are usually higher than the most competitive mortgage rates on the market. See more below.
Variable Rate
These are mortgages where the interest rate can change at any time. There are several different types of variable rate mortgage – which might be right for you will vary at different times, depending on which way interest rates are predicted to move.
Pros
It’s normally free to leave your lender or make early repayments.
Cons
The interest rate may go up so much that you struggle to meet your repayments.
It may be expensive compared to other deals.
Standard variable rate mortgages:
Your payments move up or down at the lender's discretion. Their decision may be influenced by changes in the Bank of England’s interest rate. This type of deal lasts until your mortgage ends.
Discount Rate Mortgages
Discount rate mortgages are a bit like a special offer to draw you in. They are cheaper than a lender’s standard variable rate, but linked to it. For example, if the lender’s standard variable rate is 5% and you take out a mortgage where the discount is 2% you’d be paying 3%. If the discount was 1% you’d be paying 4%. The discount rate will only be on offer for an introductory period – usually between two and five years. When that period ends, your mortgage will revert to the full standard variable rate. However, you can sometimes be tied in to the mortgage for a few years longer than the discount period. Either way, you may have to pay an early repayment charge if you want to leave before the end of the tied-in period.
How to compare them all
You need to add up the cost of any arrangement fees, booking fees and valuation fees to see if the mortgage really is cheaper than its rivals.
You should look carefully at whether there is an early repayment charge or exit fee after a fixed or discounted period has ended. This could leave you tied in to a high rate or paying a lot of money to move to a different mortgage.