Variable
This type of mortgage rate is usually referred to as the ‘lenders standard variable rate’. As the name suggests the rate can fluctuate up or down usually in line with the changes to the Bank of England base rate. You should not be ‘locked’ into this rate.
Fixed
This mortgage has a rate that is fixed for a specified time period. The general rule is that the shorter the term the lower the rate. You will need to be aware of the redemption ‘lock in’ period. This type of scheme is good if you want to know exactly how much the mortgage payments are going to be each month and therefore can assist in budgeting. The major downside is that if rates reduce you may be left paying a high rate.
Capped
This type of rate is very similar to a fixed rate with the additional advantage that should rates drop then the capped rate reduces in line but if rates go up the ‘cap’ means that this rate remains constant at the initial rate. These rates are quite rare at present and will undoubtedly be more prolific should we experience a period of higher interest rates.
Discount
Your interest rate paid is calculated by discounting off the variable rate- ie a lender will give you a discount off their standard variable rate for a period of time. The feature of this is that although you can get lower rates it will fluctuate with changing interest rates. One important note is that although lenders generally move their standard variable rate in line with the base rate they are not duty bound and therefore can make their own adjustments.
Base Rate Tracker
These rates are very similar to discounted rates in that they fluctuate with general interest rate changes. The main difference is that they reflect the Bank of England base rate changes automatically.
Flexible
These are schemes that allow extra features such as:
• Over payments
• Under payments
• Payment holidays
• Linked to current or savings accounts for offset purposes
The advantages of these mortgages are that you can effectively control your mortgage term so as to reduce the amount of total interest you pay. The downside is that you usually pay a slightly higher interest rate for the additional flexibility.
Cashback mortgages
This type of mortgages offers a % of the mortgage in the form of a cashback paid to the applicants on or just after the drawdown of the mortgage. This can be useful to first time buyers who need extra monies to furnish the property. The downside is that the rates are usually not very competitive and there can be large redemption penalties.