Mortgage Basics: Fixed vs Tracker, Repayment vs Interest-Only

Understanding how mortgage interest works, what lenders look for, and the trade-offs between different product types can save you thousands over the life of your loan.

1. What is a Mortgage?

A mortgage is simply a loan used to buy property, where the property itself acts as security for the lender. If you fail to keep up repayments, the lender can repossess the home to recover their money. Most mortgages last between 20 and 35 years, though shorter terms mean higher monthly payments but less interest overall.

2. How Mortgage Interest Works

Each month, you repay some of the money borrowed (the capital) plus interest. The interest is charged on the remaining balance, so early on your payments are mostly interest, while later they go more toward the capital. Your quoted rate (such as 5.09%) is an annual figure—divided into monthly or daily portions for actual calculations.

Even small differences in rate make a big difference in total cost. For example, on a £250,000 loan over 25 years, 0.5% difference in rate could cost around £20,000 extra in interest over the term.

3. Fixed-Rate Mortgages

A fixed-rate mortgage locks your interest rate for a set period—often 2, 3, or 5 years. During that time your payments won’t change, giving you certainty about budgeting. When the fixed period ends, your loan usually moves to the lender’s standard variable rate (SVR), which is typically higher.

Advantages

• Predictable payments — ideal for stable budgeting.
• Protection if rates rise during the fix.

Disadvantages

• You may pay more if market rates fall.
• Early repayment or switching can trigger penalties (ERCs).

4. Tracker and Variable Mortgages

A tracker mortgage follows a benchmark rate—usually the Bank of England base rate—plus a set percentage (e.g. “Base + 1%”). If the base rate goes up or down, your payment changes accordingly. A discount variable mortgage, meanwhile, tracks a lender’s own rate (SVR) at a discount for a set period.

Advantages

• Cheaper when interest rates fall.
• Often lower initial rates than fixed deals.
• Usually smaller early-repayment fees, offering flexibility.

Disadvantages

• Your payments can rise if the Bank of England raises rates.
• Harder to budget for the long term.

5. Repayment vs Interest-Only Mortgages

There are two main ways to structure your payments:

Repayment Mortgages

Each payment covers both interest and a slice of the loan itself. By the end of the term, the mortgage is fully paid off. This is the most common type for residential borrowers because it steadily builds equity and guarantees full repayment if you make all payments on time.

Interest-Only Mortgages

You only pay the interest each month, not the capital. This keeps monthly costs low but means you’ll still owe the full amount at the end. Lenders usually require a clear repayment plan—like investments, property downsizing, or savings—to show how you’ll repay the balance.

6. What Lenders Look For

Lenders assess affordability, credit history, and loan-to-value (LTV) ratio. The lower your LTV (the more deposit you have), the better the rate you’ll qualify for. For example, a 60% LTV loan (40% deposit) attracts much lower rates than a 90% LTV one.

• Income & expenses: Lenders “stress test” your ability to pay if rates rise.
• Credit score: A clean history helps access top deals.
• Property type: Unusual or new-build properties may limit lender choice.

7. Deciding What’s Right for You

If you prefer certainty and stability, a fixed rate is ideal—especially if you expect interest rates to rise. If you can handle some payment fluctuation and want flexibility or to overpay freely, a tracker or discount variable could save money when rates fall.

Similarly, for most homeowners a repayment mortgage is safer and more sustainable. Interest-only tends to suit buy-to-let investors or those with a clear financial strategy to repay later.

8. Switching and Overpaying

You can often remortgage when your fixed or tracker deal ends to avoid reverting to the higher SVR. Even modest overpayments—say £100 a month—can cut years off your mortgage and save thousands in interest. Many lenders allow up to 10% overpayment per year without penalty during a fixed deal.

9. Key Takeaways

• Fixed = stability, Tracker = flexibility.
• Repayment = guaranteed payoff, Interest-only = higher risk.
• Compare APRC, fees, and flexibility—not just the rate.
• Use calculators (like those on CalcFlow) to model scenarios and total costs.

Mortgages can feel complex, but once you understand how the pieces fit together—rate type, term, repayment structure, and fees—you’ll be in a strong position to choose a deal that matches your goals and comfort with risk.