Applying for a mortgage is a big decision, so it’s important to know the difference between the various types on the market. Picking the right one can save you a lot of money over the length of an agreement. The amount of money you pay back and the way you pay it is directly affected by the type of mortgage you choose and, while learning about different mortgage types can be overwhelming, having a firm grasp on the different options available will help streamline your decision-making process.
A tracker mortgage is one of two types that fall under the heading of variable rate mortgages. Repayments on a tracker mortgages are tied to the Bank of England’s base rate of interest. A typical tracker rate is the Bank of England rate plus 1-3%, and they often act as an introductory deal that switches to a different rate after an agreed period of time.
Tracker mortgages are a good way for a borrower to get ahead on their payments if the rate is low. If you do use your tracker period to overpay on your deal, make sure you’re not liable to incur financial penalties for doing so. Tracker rates can be beneficial for the borrower when the base rate is low but, conversely, can leave you worse off if the rate changes.
Discount mortgages are the second type under the variable rate heading. Discount mortgages are paid back at the standard variable rate set by the lender minus a set discount. These mortgages are defined as variable because they are often used as introductory offers and the interest rate is liable to change after an agreed period.
Discount mortgages do offer a good deal initially but, because repayments are tied to the standard variable rate the total amount you are obliged to pay back will change whenever the SVR does. The lack of stability that comes with any variable rate mortgage may be an advantage or a disadvantage depending on the borrower’s personal circumstances
3. Standard variable rate
Repayments on a standard variable rate mortgage are set at the lender’s default rate. SVR mortgages are sometimes known as reversion rate mortgages and are normally used as the basic rate from which other deals are calculated. Every lender sets their own SVR at a level of their choosing and it’s not necessarily connected to any other financial measure
A lender can change their SVR on a whim so it’s important to keep track of the rate you’re paying and to shop around for the best deal. The uncertainty involved with having an SVR mortgage is often enough to put borrowers off.