Standard Variable Rate

The interest rate goes up and down during the life of the mortgage reflecting any changes to the Bank of England base rate. Put simply, if the base rate increases, so will your mortgage payments. However, the opposite applies if the base rate it reduced.

Fixed Rate Mortgages

A fixed interest rate mortgage offers the borrower certain knowledge of just how much their mortgage payments will be each month for a set period of time. Fixed rate mortgages for the full term of the mortgage remain relatively rare in the UK housing market but a commonplace in the US.

However, a mortgage interest rate that does not vary with base interest rates may be convenient for household budgeting purposes. You do run the risk, if the base rate falls, of paying over the odds while others see their mortgage costs coming down. You may also face a nasty shock at the end of the fixed rate period if interest rates have risen substantially and there is a large jump in the rate your lender wants you to pay.

These risks notwithstanding, fixed rate mortgages have become increasingly popular because of the certainty they deliver (for a period tending to be between 1-10 years). Do bear in mind that these deals tend to have penalties.

Discounted Rate Mortgages

This type of rate offers a discount off the lender’s variable rate for a set period of time for example 1% for 2 years. This means that although the rate is lower than the variable rate it will still go up and down with any changes to the base rate. Some discounts will tie you in for the length of time of the discount and others will have no tie-ins allowing for over payments or early repayment of the loan.

Cashback Mortgages

These are usually charged at the variable rate but a percentage of the loan is paid to the borrower shortly after completion. This is usually repayable if the mortgage is repaid within a certain agreed period.

Capped Rate Mortgages

A capped rate mortgage puts a maximum limit on the interest rate that you have to pay. You therefore gain the security of having a 'ceiling' or upper limit to the amount that the lender can increase the interest payable on your mortgage.

This period of capped interest is for a specified period only; typically between one and five years. At the end of the specified period your mortgage will usually revert to a variable rate. However, it is possible to find a capped rate mortgage that can last for the entire life of the loan. Although this arrangement initially sounds attractive, some capped rate mortgages also have a 'collar' or lower limit below which the interest on your loan cannot fall.

Tracker Mortgages

These rates operate in a similar way to a discounted rate, but they track the Bank of England base rate rather than the mortgage base rate. They are usually a certain percentage above the bank base rate for a set period of time.

Often tracker rates are very flexible allowing for overpayments of the mortgage without penalty. Some lenders will allow payment holidays where you can request to miss payments for a certain length of time but normally there are restrictions attached.

Flexible Mortgages

In recent years, however, lenders have introduced flexible mortgages into the market that allow you to vary your monthly repayments. Generally speaking you have the option of overpaying, underpaying, or even taking a payment holiday. The obvious advantage of overpaying, for example, is your outstanding loan will reduce more quickly. And this will cut your monthly payments in the long run.

Conversely your financial circumstances may temporarily change and you might have the need to pay less. The advantage of a flexible mortgage is you will not be penalised in these circumstances. But if you wish to make an underpayment you will only be allowed to do so as long as overpayments have previously been made. Indeed, it is important to note that the terms and conditions for this type of mortgage will vary from lender to lender.

From a practical standpoint, the flexible mortgage can offer a combination home loan and current account rolled into one. So, if you take out say a £150,000 mortgage, and then you win £50,000 on the lottery, you can simply, without penalty, reduce the size of your mortgage to £100,000. Flexible mortgages often come with a ‘cheque book’ attached. So conversely, if you suddenly need an extra £5,000 for a new bathroom, you will be able to write a cheque and in the process increase the overall size of your mortgage to £105,000.

Early Repayment Penalties

Penalties apply to some mortgages if you repay some or all of your loan within a specified period. Usually this charge is during the period of any special deal such as the time that the rate is fixed or discounted for. However, some deals have a penalty which applies for longer than the mortgage deal therefore committing you to their variable rate once the deal is finished.

Our advice will normally be to avoid any rate where the repayment charge runs beyond the end date of the rate. This then gives you the freedom to shop around for another competitive deal with our help of course. Sometimes there is no alternative than to have a penalty run on for longer but we will try to avoid it.

Some mortgage rates have no penalty at all and these are good if you are looking to make extra payments or are likely to repay the loan short term. Other rates may have repayment charges but still allow you to pay up to 10% of the loan per year penalty free.

Your home may be repossessed if you do not keep up repayments on your mortgage.

The FSA does not regulate legal advice or some forms of mortgage.

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