Mortgage Rates

Once you are clear about the type of mortgage you want, capital repayment or interest only, choosing how you want to be charged is the next decision. The options are as follows.

Variable rate

This is the one that moves up and down, mirroring the base interest rates set by the Bank of England. Lenders aren’t tied to these rates, so can vary them.

Your lender will set their variable interest rate higher than the base rate, usually 1% or 2% above it. If the base rate is 4.5% and your mortgage lenders’ variable rate is 1.5% above it, you will pay 6% interest. Be watchful, as variable interest rates vary widely between lenders and they are not as competitive as other mortgage deals on the market.

Fixed rate

This rate gives greater certainty, as your interest payments are guaranteed not to change for the duration of the fixed term, typically between one and five years. Occasionally you can find longer terms. At the end of your fixed rate term, the interest rate will usually revert to the lenders standard variable rate.

If interest rates fall below your fixed rate during the duration of the loan, you end up paying more than if you’d chosen the lenders variable rate. You may have to pay a reservation fee for the fixed rate, called an arrangement fee. If you change your mortgage during the fixed rate period, and sometimes for a period after it ends, you will usually have to pay the lender an early repayment charge.

Capped rate

These interest payments have a fixed maximum or 'cap' that you will pay for a fixed term. If interest rates rise, yours will not exceed above this ceiling rate. You get a certain degree of protection if rates rise significantly, and if they fall, you pay less. The interest rate set for capped deals is often slightly higher than fixed rates.

This security can make it easier to budget for your monthly mortgage payment. At the end of your capped rate term, the interest rate will revert to the lenders standard variable rate. If you change your mortgage during the capped rate period, and sometimes for a period after it ends, you will usually have to pay the lender an early repayment charge.

Discounted rate

You will receive a guaranteed discount on the lenders standard variable rate for a fixed term. So, if the lenders standard variable rate is 5.5%, with a guaranteed discount of 1%, you will pay 4.5% interest for a set period. Remember though that only the amount of the discount is fixed. The rate will still be variable so the amount you pay can still go up.

You may have to pay an arrangement fee to reserve the lenders’ deal. If you change your mortgage during the discounted rate period, and sometimes for a period after it ends, you will usually have to pay the lender an early repayment charge.

Tracker rate

Lenders will set their tracker rate at a certain margin above or below the Bank of England base rate, and move in line with it. If the base rate drops, you will benefit financially, paying less in interest. But equally, you will feel the pain of rate rises. The base rate is currently at an historical low, and any future changes will almost certainly be upwards. This should be taken into account when comparing tracker rates against other products on the market. You can find tracker rates for a set number of years or for the life of a loan.