Variable Rate

Also known as Standard Variable Rate (SVR) and Standard Rate. If you don’t pick a product (or your initial product term expires without you choosing a new one) the lender would place you onto their SVR. 

These tend to be higher than other rate options and are set directly by the lender. This means if the Bank of England lower their Base Rate it won’t necessarily be reflected in the SVR. 

It can be difficult to budget for payments as this can increase or decrease at any time, by any amount, so you will be less likely to know how much your mortgage payments will be. 

On the plus side, if you were to cancel your mortgage before the end of your contract (for example, by switching lenders) they are less likely to charge you a cancellation fee. 

Fixed Rate

In recent years this has been the popular choice for the majority of consumers. 

It is very straight forward. You agree to a contracted term (usually 2, 3 or 5 years) of paying a set amount of interest. What happens with the Base Rate is irrelevant, your payments will remain the same during the whole of your fixed term.

As your payments are fixed you will easily be able to budget. There are some drawbacks though. While you will benefit it the Base Rate jumps up, you could lose out on any savings should it drop. There are normally start-up costs, including an Arrangement Fee charged by the lender, and if you were to end your contract early you are likely to be charged an Early Repayment Fee. 

Tracker Rate

This product ‘tracks’ another interest rate and moves directly in line with it. For most this will be the Bank of England Base Rate. So, if the Base Rate rises by 0.5%, so will the Tracker Rate. Some track other financial indices, such as LIBOR (London Interbank Offered Rate).

This rate also tends to have terms of 2,3 or 5 years, although longer terms are sometimes available. 

As you will be tracking another interest rate the payments are likely to fluctuate, meaning it will be more difficult to budget for your mortgage payments. There are normally start-up cost fees charged by the lender, and you are likely to be charged an Early Repayment Fee if you cancel your contract early.