UK Mortgage lenders offer a whole raft of deals that are priced lower than their standard variable rate (SVR) of interest, and this can make choosing a loan seem very confusing.
But, actually, most of the deals on offer are basically fixes or discounts, and deciding which you prefer is a major step towards selecting your mortgage.
What is a Fix?
With a fixed-rate deal you agree at the outset to pay your mortgage lender a certain rate of interest for a certain number of years.
If you want to get out of the deal early, you will face an early redemption penalty.
The Pros: You know exactly what your mortgage payment will be each month, and even if interest rates generally rise, your costs won’t go up.
The Cons: If interest rates generally fall, you could be stuck on an uncompetitive rate for years.
What is a Discount?
With a discounted deal, you agree to pay a certain percentage below your lender’s standard variable rate (SVR) for a certain number of years.
Again, if you want to get out of the deal early, there will be an early redemption penalty.
The pros: If interest rates fall, your monthly payment will go down.
The cons: If interest rates rise, your monthly payment will go up.
How to Choose Between Them
If you can’t afford to have your payments increase, or you believe interest rates will rise, you might be best to choose a fix.
If you can afford to take the risk that your payment will rise, or you think rates are going to fall, you might prefer a discount.
To help you decide what length of fix or discount to take, read What length of deal should I choose?
To find out more about redemption penalties, go to Early redemption penalties explained.
For more on interest rates generally, see What is a standard variable rate?