Mortgages explained: fixed, variable, and what to watch for
A plain-English guide to mortgage types, what lenders look at, and the traps that cost people money
If the house buying article was about whether and why to buy, this one is about the how. Specifically, the mortgage itself: the product that makes the purchase possible and the one most people spend the least time understanding before signing up for 25 to 30 years of payments.
Most of us choose a mortgage based on whatever our broker suggests or whichever headline rate looks lowest. That is a bit like picking a medication based on the nicest-looking box. The headline rate is important, as is the fee structure, the flexibility, the revert rate, and what happens when the deal ends. Ignoring these things is a risk that can cost you money and, sometimes, a lot of money.
How a mortgage actually works
A mortgage is a loan secured against a property. If we stop paying, the lender can repossess the house to recover what they’re owed. That security is what allows them to lend such large amounts at relatively low interest rates compared to unsecured debt.
There are two elements to every mortgage payment: the capital (paying back the money we borrowed) and the interest (the cost of borrowing the money).
On a repayment mortgage, each monthly payment covers some capital and some interest. In the early years, the split is heavily weighted toward interest, because we owe the most. Over time, as the balance reduces, more of each payment goes toward capital. By the end of the term, the mortgage is fully repaid.
On an interest-only mortgage, we pay only the interest each month. The capital balance stays the same. At the end of the term, we still owe the full amount we borrowed and need another way to repay it (selling the property, using savings, or refinancing). Interest-only mortgages are rare for residential buyers now and lenders require evidence of a credible repayment plan. For most NHS staff buying a first home, a repayment mortgage is the standard and sensible option.
The main types of mortgage deal
Every mortgage deal is either fixed or variable. Within those two categories, there are a few variations worth understanding.
Fixed rate
Our interest rate stays the same for a set period, typically two, three, or five years (though seven and ten-year fixes exist but rare). Monthly payments are predictable regardless of what happens to the Bank of England base rate during that period.
When the fixed period ends, the mortgage reverts to the lender’s Standard Variable Rate (SVR), which is almost always significantly higher. At that point, we need to remortgage onto a new deal, either with the same lender or a different one.
Fixed rates are the most popular choice in the UK, and for good reason. They make budgeting straightforward, which matters when money is tight. The trade-off is that if interest rates fall during the fixed period, we don’t benefit as we’re locked in.
Most fixed rate deals include early repayment charges (ERCs). If we want to pay off a large chunk of the mortgage early or switch to a different lender before the fixed period ends, there’s usually a penalty (often 1% to 5% of the outstanding balance, declining each year). Most lenders allow overpayments of up to 10% of the balance per year without triggering the charge. That 10% allowance is worth using if we have spare cash, because every pound of overpayment reduces the balance on which interest is calculated.
Tracker
A tracker mortgage follows the Bank of England base rate plus a set margin. If the base rate is 3.75% and the tracker is base rate + 1%, the mortgage rate is 4.75%. If the base rate drops to 3.5%, the rate drops to 4.5%. If the base rate rises to 4%, the rate rises to 5%.
Trackers are transparent because the rate moves in direct proportion to an external, publicly known number. There is no ambiguity about why the rate changed.
The risk is obvious: if the base rate rises, payments go up. For someone on a tight budget, this can be difficult to manage. For someone with financial headroom and a belief that rates are heading down, a tracker can be cheaper than a fixed deal over the same period.
Some trackers have no early repayment charges, which gives flexibility to switch to a fixed deal if rates start rising. Others do carry ERCs, so it’s essential to check the terms.
Standard Variable Rate (SVR)
The SVR is the lender’s default rate. It is not tied directly to the base rate (the lender sets it and can change it whenever they want, though in practice it tends to follow the base rate loosely). SVRs are almost always more expensive than fixed or tracker deals and can be anywhere from 5% to 8% or more.
Nobody should be on the SVR by choice. It’s the rate we fall onto when a fixed or tracker deal ends and we haven’t remortgaged. Rolling onto the SVR for even a few months costs more than it should. Setting a reminder three to six months before a deal ends is one of the simplest ways to save money on a mortgage.
Discount variable
A discount mortgage offers a rate set at a certain percentage below the lender’s SVR. If the SVR is 7% and the discount is 2%, we pay 5%. But if the lender raises the SVR to 8%, we pay 6%.
The problem is that the SVR is controlled by the lender, not by an external benchmark. This makes it less transparent than a tracker. The discount sounds appealing, but we’re discounting from a number the lender can change at their discretion.
What lenders actually look at
When we apply for a mortgage, the lender assesses two things: can we afford the repayments now, and could we still afford them if rates rose?
Income and employment. NHS staff are generally viewed favourably by lenders because of job stability and regular income. Most lenders will accept our basic salary straightforwardly. Overtime, enhancements, and unsocial hours pay may be partially included if we can show they are regular (typically with three to six months of payslips showing the pattern). Bank and agency income is treated differently and often attracts less favourable terms.
Existing commitments. Credit cards, car finance, personal loans, and student loan repayments all reduce how much we can borrow. The lender deducts these from our disposable income before calculating affordability. As we covered in managing debt on an NHS salary, student loan repayments in particular can reduce borrowing power by £10,000 to £25,000 depending on salary and plan type.
Credit history. Missed payments, defaults, County Court Judgements, and high credit utilisation all count against us. The good news is that credit history can be improved over time. Paying bills on time, keeping credit card utilisation low (below 30% of the limit), and being on the electoral roll all help. It’s worth checking our credit file with one of the main agencies (Experian, Equifax, or Money Saving Expert) before applying.
Stress testing. Lenders don’t just check whether we can afford the current rate. They test whether we could still afford the mortgage if rates were several percentage points higher. This is why we sometimes can’t borrow as much as we think we should be able to on paper.
Deposit size. As covered in the house buying article, a larger deposit means lower LTV, which means access to better rates and more lenders.
Two-year fix versus five-year fix
This is the question most borrowers agonise over, and the honest answer is that nobody knows which will turn out cheaper. If we did, everyone would make the same choice.
A two-year fix is typically slightly cheaper in headline rate. It gives us flexibility to remortgage sooner, which is useful if rates fall or if our circumstances change (we might want to move, or our salary might increase enough to access better deals). The downside is that we face remortgaging costs and rate uncertainty every two years.
A five-year fix costs slightly more in headline rate but gives certainty for longer. We know exactly what we’ll pay for five years, which makes long-term budgeting easier. The downside is that if rates drop significantly during those five years, we’re locked in (and breaking early triggers ERCs).
For many NHS staff buying a first home, a five-year fix is often the more sensible choice. It provides stability during the period when we’re adjusting to mortgage payments, building financial habits, and probably not planning to move. But this is a personal decision, not a rule.
The things that trip people up
Arrangement fees
Some of the “best” mortgage rates come with arrangement fees of £1,000 to £2,000. A mortgage at 4.5% with a £2,000 fee may cost more over the deal period than a mortgage at 4.7% with no fee. Always calculate the total cost over the fixed period (monthly payment times number of months, plus fees), not just the monthly payment.
A broker or comparison site that shows the “total cost of the deal” rather than just the rate makes this easier.
Not remortgaging when a deal ends
This is probably the most expensive mistake in personal finance. When a fixed deal ends, the mortgage rolls onto the SVR, which might be 2% to 3% higher than available deals. On a £200,000 mortgage, that could cost an extra £200 to £400 per month for every month we delay.
Set a reminder six months before the deal ends. Start looking at options. Apply for a new deal in good time. The process doesn’t need to be stressful if it’s not left to the last minute.
Thinking only about the monthly payment
A 35-year mortgage term has lower monthly payments than a 25-year term, but the total interest paid over the life of the mortgage is dramatically higher. On a £200,000 mortgage at 5%, the difference between 25 and 35 years is roughly £60,000 in additional interest.
A longer term might be necessary to make the monthly payments affordable, and that’s fine. But if we can afford the higher payments of a shorter term, the savings over the life of the mortgage are substantial. Some people start on a longer term and overpay each month, which achieves a similar result while keeping flexibility if money gets tight.
Ignoring the total interest cost
On a £200,000 mortgage at 5% over 25 years, the total repayment is roughly £350,000. That means we pay back £150,000 in interest alone, on top of the original loan. At 4%, the total interest drops to about £117,000. That 1% difference in rate is worth over £30,000 over the life of the mortgage.
This is why chasing even a small rate improvement matters, and why paying arrangement fees for a lower rate can be worthwhile when spread over a five-year term.
Not using the overpayment allowance
Most fixed rate mortgages allow overpayments of up to 10% of the outstanding balance per year. If we have spare cash (from a bonus, a tax refund, or simply from good budgeting), putting it toward the mortgage reduces the balance on which interest is charged. The effect compounds over the term.
On a £200,000 mortgage at 5%, overpaying by just £100 per month from the start could save roughly £25,000 in interest and knock several years off the term. That is worth more than almost any savings account.
Whether overpaying the mortgage is better than investing depends on the mortgage rate versus expected investment returns, as we discussed in the house buying article.
A note on mortgage brokers
A whole-of-market mortgage broker can access deals from across the market, including some that aren’t available directly from lenders. They do the comparison work, handle the application, and chase the lender when things slow down. Many brokers are fee-free (they’re paid by the lender on completion), though some charge a fee for more complex cases.
For first-time buyers especially, a broker is worth considering. The mortgage market has thousands of products, and the difference between a good and mediocre choice can be tens of thousands of pounds over the term. A broker who understands NHS pay (including how enhancements and overtime are treated by different lenders) can often secure better terms than we’d find on our own.
As with everything else in this process, broker fees are negotiable. If a broker quotes a fee, it’s worth asking whether it can be reduced or waived.
On-call summary
A repayment mortgage pays off both capital and interest over the term; interest-only mortgages leave the full balance owing at the end
Fixed rate mortgages provide payment certainty for a set period (typically two or five years); tracker mortgages follow the Bank of England base rate and move with it
The Standard Variable Rate is the lender’s default and almost always the most expensive option; never stay on it longer than necessary
Always calculate the total cost of a deal (rate plus fees over the deal period), not just the headline rate or the monthly payment
Set a reminder six months before a deal ends to start remortgaging; rolling onto the SVR costs hundreds per month
Overpaying within the annual allowance (usually 10% of balance) reduces interest and shortens the term significantly
Longer mortgage terms reduce monthly payments but dramatically increase total interest; consider overpaying on a longer term to maintain flexibility
A whole-of-market mortgage broker can access deals we can’t find directly and is particularly useful for first-time buyers
Catch up on what you may have missed:
This article is for educational purposes only and does not constitute financial advice. Mortgage products are complex and individual circumstances vary. For advice tailored to your situation, please consult a qualified mortgage broker or financial adviser.