Meet Beth. She is a 32 year old Chief Financial Officer living in London. She is a single woman, renting her apartment and enjoys activities such as going to the gym, weekend events with friends and travelling on holiday. She is now at a place in life where she is ready to buy her first home.  Two weeks ago, Beth visited with a Mortgage Broker who discussed with her the various options to finance her dream home. The list of choices he gave her left Beth a little bit confused.

Now meet the Pecks, they are family of 4 that are outgrowing their small apartment in Cardiff. The parents, Jim and Kortnie have found a five bedroom and four bathroom house and have visited a Mortgage Broker for guidance. Like Beth, the Pecks received a long list of mortgage choices to choose from; and as can be suspected, they too were left confused. 

The similarity shared between the Pecks and Beth is pretty straightforward: they both are challenged when it comes to understanding the mortgage schemes available within the UK. In this article, we are going to explore each of the mortgage categories that exist in the UK. But first, let’s begin with an obvious question: what is a mortgage?

According to Oxford Dictionaries (n.d.) mortgages are the “legal agreements through which a bank or other creditor lend money at interest in exchange for taking title of the debtor’s property.” 

With all mortgage there is a condition that the ‘conveyance of title becomes void upon the payment of the debt.’ Simply put a mortgage is a loan that makes it possible for you to buy a property. Within the UK there are three types of mortgages:

  1. Fixed Rate Mortgage
  2. Variable Rate Mortgage and
  3. Offset Mortgage.

Choosing the wrong mortgage can result in unwelcome financial challenges and losses; therefore, we hope this article will help  you understand and choose the correct mortgage type. Additionally, we suspect that the explanation we give in this  article will help people like Beth and the Pecks who are currently confused about their mortgage choices. 

  1. Fixed Rate Mortgage

A fixed rate mortgage is a loan that carries the same interest rate throughout the lifecycle of the loan. It may help to know that the interest rate is the fee the lender charges for the loan they give you. All recurring payments that are made towards your loan reduces your principal, i.e. the money you were lent. With a fixed rate mortgage your monthly repayment remain fixed, therefore giving you the opportunity to budget these cyclical payments. 

The mortgage period on fixed rates can be anywhere from 2 – 15 years. During this time the lender offers a competitive interest rate. However once your fixed loan ends, you are moved to a variable mortgage rate. 

2. Variable Rate Mortgage

Unlike a fixed mortgage rate, a variable one is subject to change throughout the remaining term of your loan. What this means is that the lending fee or interest rate goes up and down depending on the state of the economy. It is often true that while the economy is doing well variable rates go up. Contrastingly, when the economy is doing poorly, the rates go down.

Within the UK, variable mortgage rates come in four forms: Tracker Mortgages, Standard Variable Rate Mortgages, Discounted Mortgages and Capped Mortgages.

Tracker Mortgages

A tracker mortgage is a home loan whose rates are hinged on the Bank of England’s base rate additional to a predetermined percentage. The current Bank of England base rate is 0.1%. It was cut on the 19th March 2020, just a week after being cut to 0.25%. It had been at 0.75% since the 2nd August 2018. What this means, by way of examples, is this: the current base rate of 0.1% is going to be added to the lender’s assigned percentage; and the sum of the two will be your interest rate. 

It must be understood that your interest rate can change multiple times throughout the year. Why? Well, the Bank of England’s Monetary Policy Committee sets the base rate as often as is necessary. Throughout any given year, they meet eight times; and while it has never been the case it is possible that the base rate changes with each meeting they have. If realised, your interest rate could change as many as eight  times within a given year! Rest assured that while possible, it is highly unlikely that this happens. Prior to the 2020 change in the base rate, the figure had remained at 0.75% for 2 years. 

Because a tracker mortgage is variable, it is often the case that the total you repay per month will change. In instances where there’s an increase in the amount you repay, the extra monies paid will be towards your interest rate and not your principal. What this means is that you would be paying more each month without actually clearing a greater proportion of your mortgage debt.

There are two types of tracker mortgages, one lasts between 2 to 5 years before being reverted to the lender’s standard variable rate and the other may span the lifespan of your loan (lifetime tracker). Having a lifetime tracker is risky business because no one can predict how rates might move over time. Consequently, such mortgages come with higher interest rates. You can choose this mortgage option if you suspect the base rate with get and remain low, but you must plan for the likely event of it going up as well.

Standard Variable Rate Mortgages

A standard variable rate mortgage has its rate set by the lender regardless of the base rate we spoke about earlier. Please note, however, that the rates you’re initially given are prone to modification during an economic or commercial change. This means your repayment amount could increase overtime, and may complicate your monthly outgoings.

Standard variable rate mortgages are not usually available for new customers. Instead, it is issued to existing mortgagers who are transitioning from a fixed rate or two-five-year tracker mortgage, because you are likely to pay more on this type of mortgage than the precursory ones (i.e., fixed and the temporary tracker) you are welcome to remortgage for better deals. 

Discounted Mortgages

Discounted mortgages often occur when a cut-rate is applied to the lender’s standard variable rate (SVR) for a short period of time. Usually, the lifespan of a discount mortgage is 2 years. This particular mortgage can be misleading because it doesn’t account for the probable surge that comes when the lender increases their SVR. For instance, if you get a 4% discount off the SVR when it was 8% and the lender later doubles its SVR then your rate has jumped from 4% to 12% the moment the SVR was doubled. In light of these facts, it is strongly recommended that you do not venture into a discounted mortgage because the probable changes can challenge your finances. 

Capped Mortgages

Capped mortgages occur whenever there is a ceiling or cap rate within your agreement. What this means is that there is a maximum rate above which you never go. Such mortgages, because of their benefits, are hard to find. It is often the case that they give flexibility and security in the fact that you repay amounts you are comfortable to expend.

3. Offset Mortgage

Lastly, let’s consider the offset mortgage. This type of mortgage keeps your mortgage debt and any savings separate if the same bank or building society is responsible for your savings and loan. The money from your savings is then used to “offset” the amount of interest you pay on your mortgage. 

For example, if you have a £370K mortgage and savings of £100K, you only pay interest on the difference of £270K. 

If you have a nice amount of savings then this type of mortgage is a good choice; because it can help to reduce the cost of your monthly payments. It can also help you pay off your mortgage quicker which ultimately means you will save more money overtime. 


In this article we looked at the different types of mortgages that are common within the UK. It is very important to understand what each entail in order to make the right decision. If you have any further questions or would like to have a more in-depth discussion about with us, please contact a Percom representative today.