Mortgage lenders offer three standard mortgage types: fixed rate, variable rate, and tracker mortgages.
With a fixed rate mortgage, the interest you pay is fixed for a set number of years, irrespective of the market and the Bank of England base rate. They can give people the security of knowing their monthly payments won’t rise for a set period – usually between 2-5 years. Some fixed rate mortgages allow you to freeze the interest rate for as long as 10 years.
However, while a fixed rate can offer security there are some downsides. They are often slightly higher than variable rates because the lender is taking a gamble – if rates rise then the lender could be left out of pocket. Also, most fixed rates charge an early redemption fee, or early redemption penalty, should you wish to settle your mortgage during the fixed term.
That means if you want to get out of the mortgage, perhaps because rates are falling or you want to sell up, you’ll have to pay a fee that could potentially be thousands of pounds.
With a tracker mortgage, the interest rate tracks the Bank of England base rate.
A variable rate mortgage is often cheaper than a fixed rate mortgage, and less likely to have an application fee or early redemption penalty. However, because the rate is variable you are taking a risk that rates could rise and your costs would too.
Currently interest rates are low but in the past they have been as high as 15%.