Standard variable rate (SVR)
This is the normal interest rate your mortgage lender charges homebuyers and it will last as long as your mortgage or until you take out another mortgage deal.
Changes in the interest rate might occur after a rise or fall in the base rate set by the Bank of England.
Freedom – you can overpay or leave at any time
Your rate can be changed at any time during the loan
This is a discount off the lender’s standard variable rate (SVR) and only applies for a certain length of time, typically two or three years.
But it pays to shop around. SVRs differ across lenders, so don’t assume that the bigger the discount, the lower the interest rate.
- Cost – the rate starts off cheaper which will keep monthly repayments lower
- If the lender cuts its SVR, you’ll pay less each month
- Budgeting – the lender is free to raise its SVR at any time
- If Bank of England base rates rise, you’ll probably see the discount rate increase too
Tracker mortgages move directly in line with another interest rate – normally the Bank of England’s base rate plus a few percent.
So if the base rate goes up by 0.5%, your rate will go up by the same amount.
Usually, they have a short life, typically two to five years, though some lenders offer trackers which last for the life of your mortgage or until you switch to another deal.
- If the rate it is tracking falls, so will your mortgage payments
- If the rate it is tracking increases, so will your mortgage payments
- You might have to pay an early repayment charge if you want to switch before the deal ends
Capped rate mortgages
Your rate moves in line normally with the lender’s SVR. But the cap means the rate can’t rise above a certain level.
- Certainty – your rate won’t rise above a certain level. But make sure you could afford repayments if it rises to the level of the cap.
- Cheaper – your rate will fall if the SVR comes down.
- The cap tends to be set quite high;
- The rate is generally higher than other variable and fixed rates;
- Your lender can change the rate at any time up to the level of the cap.
These work by linking your savings and current account to your mortgage so that you only pay interest on the difference.
You still repay your mortgage every month as usual, but your savings act as an overpayment which helps to clear your mortgage early.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments