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What types of mortgages are there?

There are three standard types of standard mortgage: fixed rate, variable interest rate mortgages, and tracker mortgages.

Fixed-rate mortgages

With a fixed-rate mortgage, your interest rate is fixed for a set period of time, so you get the certainty of knowing how much your repayments will be for that period no matter what happens in the market or to the Bank of England base rate. The typical term for a fixed rate mortgage is 2-5 years, although it’s possible to get them for as long as 10 years. As a general rule, the longer the term you fix for, the higher the interest rate is likely to be as the lender is taking a bigger risk.

Tracker mortgages

A tracker mortgages interest rate moves up and down in line with the base rate, and the Bank of England’s Monetary Policy Committee get together to discuss the base rate every month. If your mortgage variable rate is base rate plus 2%, for example, then it would be 2.5% while base rate is at 0.5%. 

Variable rate mortgages

Variable rates are changed by the lenders from time to time in line with market conditions but do not necessarily follow the bank base rate. New borrowers will often get a discount for an initial period e.g if the variable rate is 5%, there could be a 2% discount for the  first 2 years, then the rate would revert to the standard variable rate ( SVR). While you would benefit from lower payments if SVRs fall, your payments could also rise if rates go up.

You should be aware that for most fixed or discounted mortgage rates, you willl pay a penalty if you pay off or swap your mortgage during the initial term of the discount. It is often possible to take your mortgage product with you if you move house (known as porting), but if you think this is likely then you should check the conditions of your mortgage carefully with your lender or adviser.

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