Standard Variable Rate

A Standard Variable Rate (SVR) – sometimes known as a Base Mortgage Rate (BMR) – is the central rate of interest charged by a lender. It is loosely priced on the Bank of England base rate but will not necessarily follow its movements. Lenders’ SVRs differ, but they are usually priced considerably higher than the ‘headline’ rate offered on special deals. If a borrower is shrewd and quick enough to switch mortgages in time they will never have to pay the SVR, although it is estimated that around a third of all UK borrowers do.

Fixed-rate mortgages

This is when the rate of interest that you pay on your mortgage is fixed for a set amount of time. This is usually for two, three or five years, but 10 and even 25-year fixed rate mortgages are also available. At the end of the fixed rate term the interest on the mortgage typically reverts back to the lender’s SVR. Fixed rate mortgages are often priced at a slight premium in return for the security of payments the products offer, although this depends on the financial markets' view of future interest rate movements.

You will generally be tied into the mortgage for the length of the fixed rate term. This means that, if you redeem the mortgage during this time, an Early Repayment Charge (ERC) – otherwise known as a redemption penalty – will be charged. ERCs are usually calculated as a percentage of the outstanding remaining loan or as a percentage of the amount repaid. Often they are tiered, which means the penalty becomes less with each year of the deal; however, they can still often run into thousands of pounds.

Some, but not many, fixed rate deals will come with overhangs. This is when the duration of the tie-in is greater than that of  the fix – resulting in the borrower being tied into an expensive SVR. Any mortgage deal with an overhang should largely be avoided.

Discounted rate mortgages

This is when the lender offers an upfront discount from its SVR, for example 1.5%. When the SVR moves up and down, the rate you pay will also move by the same margin. However, remember that the SVR may not necessarily move in line with the base rate.

As with fixed rate mortgage deals, the discount will apply for a certain amount of time, but typically over either just two, three or five years. Tie-ins should last only for the deal rate period.

The initial rate you pay on a discount mortgage is typically lower than with a fixed rate deal. This is because the borrower is still exposed to interest rate changes, meaning that your repayments can go up or down.

Base Rate Tracker mortgages

As the name suggests, the price of these mortgages is pegged above the Bank of England base rate by a certain margin. This means that, as soon as the base rate moves up or down, the rate you pay will follow – exactly, and either immediately or after a contractually-agreed delay.

Because they track the base rate directly, trackers omit the lender’s SVR altogether. This usually works in the borrower’s favour, as lenders don’t always reduce their SVRs in line with the base rate, or indeed at all. However, when the base rate rises, increases in the SVR are far more likely to be mirrored exactly.

Base rate trackers can be taken over certain time periods – typically two, three or five years – before the mortgage reverts back to SVR (or a higher, lifetime tracker, rate). In this case tie-ins should last no longer than the length of the deal. Alternatively, ‘lifetime trackers’ are available which run for the full term of the loan. They do not usually come with tie-ins or redemption penalties.

Borrowers with a base rate tracker mortgage should expect a consistently varying monthly mortgage repayment. In return for this risk, interest rates are usually competitive.

Capped-rate mortgages

Less-common capped rate mortgages are almost a hybrid of fixed, discount and tracker deals. They are initially priced either on a tracker or discount basis but also come with a promise that they will not exceed a certain ‘ceiling’ rate. However,  the interest on the mortgage usually starts at the rate of the cap, so essentially this becomes a fixed rate mortgage until either the base rate comes down or the lender decides to reduce its SVR.

As the borrower benefits from the security of a cap, these deals are priced slightly higher than their more ‘variable’ discount or tracker cousins. Again, capped rates should come with tie-ins that last only for the duration of the deal.

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