Fixed rate – Fixed rate mortgages have an interest rate that remains the same for a period of time – usually between 1 and 5 years. After this period of time the interest rate reverts to a variable rate. The fixed rate is usually at a discount as an incentive to take out the mortgage.
The advantage of fixed rate mortgages is that there are no surprises for the duration of the fixed rate. The downside to this type of mortgage occurs if the Bank of England base rate or Libor rate falls, in which case you could end up paying more than you would have with a variable rate mortgage for example. Also if you want to leave before the agreed term the early repayment charge is usually significant.
Please visit our Mortgage Tools pages to see some examples of this type of mortgage.

Variable Rate – A variable rate mortgage is where the interest rate varies according to the Bank of England base rate or the Libor rate. A lender’s variable rate is set above the base rate by usually around 1 or 2%.

With this type of mortgage the interest rate can go down, saving you money, or up, in which case your interest payments increase.

Please visit our Mortgage Tools pages to see some examples of this type of mortgage.

Capped Rate – With a Capped rate mortgage the amount of interest you pay can go down if the variable rate falls and increase if the variable rate increases but cannot go above a predefined maximum.

The disadvantage of this type of mortgage is that there are only a limited number of these deals on the market and they can be less competitive than fixed or variable rates. There is also often an administration charge.

Please visit our Mortgage Tools pages to see some examples of this type of mortgage.

Discounted Variable Rates - As the name suggests, to tempt new customers, lenders will offer a variable rate at a reduced initial rate or below their standard variable rate. After the agreed period, again one to five years typically, the rate reverts to the lender’s standard variable rate.

The interest rate during the discount period will go up and down in line with the standard variable rate. Disadvantages of this type of mortgage are obviously that the rate can go up and there are early repayment charges for leaving early. It is possible that early repayment charges may be charged for a period longer than the discount period. This is called overhang.

Please visit our Mortgage Tools pages to see some examples of this type of mortgage.

For further information about interest rates on mortgages please contact us.