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Mortgage Types Explained

Discount Mortgages

With a discount mortgage, you pay the lender's standard variable rate (a rate chosen by the lender that doesn't change very often), with a fixed amount discounted. For example, if your lender's standard variable rate was 4% and your mortgage came with a 1.5% discount, you'd pay 2.5%.

Discounted deals can be ‘stepped’; for example, you might take out a three-year deal but pay one rate for six months and then a higher rate for the remaining two-and-a-half years.

Some variable rates have a 'collar' – a rate below which they can’t fall – or are capped at a rate that they can’t go above. Make sure to look out for these features when choosing your deal to ensure you understand what you're signing up to.

Tracker Mortgages

With a tracker mortgage, your interest rate 'tracks' the Bank of England base rate (currently 0.25%) – for example, you might pay the base rate plus 3% (3.25%).

In the current mortgage market, you'd typically take out a tracker mortgage with an introductory-deal period. After this, you are moved on to your lender's standard variable rate. However, there are a small number of 'lifetime' trackers where your mortgage rate will track the Bank of England base rate for the entire mortgage term.

Fixed-rate Mortgages

With fixed-rate mortgages, you pay the same interest rate for the entire deal period, regardless of interest rate changes elsewhere.

Standard Variable Rate Mortgages

Each lender has its own standard variable rate (SVR) that it can set at whatever level it wants – meaning that it's not directly linked to the Bank of England base rate.

The average SVR in March 2016 was 4.81% according to Moneyfacts. This is higher than most mortgage deals currently on the market, so if you're currently on an SVR, it's worth shopping around for a new mortgage.
Also, lenders can change their SVR at any time, so if you're currently on an SVR mortgage, your payments could potentially go up (it's unlikely a lender would decrease its SVR in the current mortgage market).
If you're still in the initial deal period of your mortgage, make a note of when it's due to end, and consider remortgaging at that point to avoid being moved on to your lender's SVR and paying more than you need to.

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