There are many types of interest rate deals available with mortgages. Choosing which one to go for at the outset can be tricky as each has its pros and cons. The most suitable deal for you depends on your individual circumstances.
Whichever type you go for, it is important to remember that most mortgage interest rates are closely linked to the Bank of England base rate, which is set at the start of each month by the Bank’s Monetary Policy Committee. Therefore changes to the base rate can affect your mortgage rate and the amount you repay each month, although your lender will ultimately decide whether or not to pass on interest rate rise or cuts.
Fixed rate mortgages
Fixed interest rate deals are the most popular option among homebuyers. As the name implies, the rate of interest rate you pay each month is fixed at a certain level for a set period, usually between two and five years, meaning you don’t have to worry if the Bank of England’s base rate or your lender’s other interest rates go up. At the end of that period, your lender will usually switch you to their standard variable rate (see below).
Early repayment charges will almost always apply if you switch away from the mortgage before the fixed rate period ends.
Standard variable rate mortgages
Each mortgage lender has a standard variable rate (SVR) for its mortgages, which it sets itself. These rates are typically between 1 and 2 percentage points higher than the Bank of England’s base rate, which ensures the lender makes a profit), and can move up or down at the lender’s discretion. Any changes, however, are usually influenced by changes to the base rate. For example, if the base rate goes up by 1 per cent, your lender may decide to increase your mortgage rate by the same amount.
Most homeowners usually end up on their lender’s SVR when their particular mortgage deal comes to an end.
There are not usually any early repayment charges with this type of mortgage rate, but you should still check with your lender.
Tracker rate mortgages
Tracker rate mortgages are variable-rate loans that are linked directly to the base rate. The interest rate is equal to or a set amount above or below the base rate. Any hikes or falls in the base rate will be matched by your tracker rate.
Early repayment charges will sometimes apply if you switch away from the mortgage before the tracker deal period ends.
Capped rate mortgages
Capped mortgages are essentially variable mortgage deals that guarantee that the interest rate will never rise above a set level (the ‘cap’), agreed at the outset, during the period of the deal. This gives you the security of knowing that your payments can’t rise above the set level, but you still benefit if rates fall. You are usually charged the lender’s standard variable rate once the capped rate period ends.
Discounted rate mortgages
A discounted interest rate is basically a discount on the lender’s standard variable rate for a set period of time. The rate can move up or down at the lender’s discretion. Once the set period comes to an end, your lender will usually move you onto the full standard variable rate.
If you consider this option, you need to make sure that when the discount ends you will be able to afford the higher payments required. You also need to be aware that discounted interest rate mortgages often don’t let you make overpayments or pay off the loan early without incurring an early repayment charge.