As the name suggests, a Fixed Rate will be ‘fixed’ and will not change for a given period of time, typically between 1 and 5 years, although it can be for longer. This type of rate is ideal for those who wish to budget accurately for a given period.
A Tracker Rate ‘tracks’ or ‘follows’ the Bank of England Base Rate (which is currently 0.50%) by a certain ‘margin’.
For example, if the margin is 2%, then your pay rate will be 2% over 0.50%, i.e. 2.50%. If the Bank of England Base Rate falls or rises then your rate will fall or rise by the same amount. Tracker rates can appear to be very good value in the current marketplace but there is always the future risk of your interest rate rising.
A Discounted Rate is whereby there the lender ‘discounts’ their standard variable rate (SVR).
For example, a lender’s SVR may be say 4.50% but they are offering a discount of 1.50% for 2 years. This means that the starting rate will be 3% but in a similar way to a Tracker Rate, your pay rate could fall or rise if the lender’s SVR falls or rises. Please note that it is the lender that determines whether the SVR will change not the movement of the Bank of England Base Rate as is the case with a tracker.
A Capped Rate may appear to have the characteristics of a Tracker or Discounted rate but with the added security of a ‘cap’ or ‘ceiling’ at which the rate will not increase above.
For example, the rate may track the Bank of England Base Rate (currently 0.50%) by 3%, giving an initial pay rate of 3.50%, but provide a cap of say 5%. This means that even if the Bank of England Base Rate increased by say a further 3%, you would never pay more than 5% for a given period of time.
What happens after the initial fixed/tracker/discount/capped period?
At the end of the initial fixed/tracker/discounted/capped period you will automatically revert to the lender’s standard variable rate (SVR).
It cannot be known what the SVR will be at the end of the initial fixed/tracker/discounted/capped period and so potentially it could be higher than the rate that is ending.
However at this point you can either obtain a new rate from the lender, or if advisable, you could remortgage to an alternative lender who may be offering better terms at that time.