Types of Rates

Once you are clear with the type of mortgage you want, repayment or interest only, now you need to select the type of rate you require.

Variable Rates

The monthly payments will fluctuate in line with the lenders standard variable rate. The rate offered mirrors the Bank of England base rates but is normally higher. You need to be watchful as variable interest rates vary widely between lenders and are not as competitive as other deals available. Some lenders offer an annual review so that the amount you pay changes once a year with the difference adjusted to your outstanding mortgage.

Fixed Rates

This will give you greater certainty as you will pay a set amount each month during the fixed rate period. This can be from 1 to 5 years or with certain lenders. You may not be able to leave or change lenders during the fixed rate period without incurring a penalty. Some lenders will allow overpayments and porting the deal to a new property without penalties.

Capped and Collar Rates.

These are tracker or discounted rates with a fixed maximum – capped – and a fixed minimum – collared – so that the rate will not go above or below a certain level when rates either go up or down.

Tracker Rates.

Lenders will set tracker rate at a certain margin above or below the Bank of England (BoE) Base Rate and the rate will move in line with it. If rates fall, you will benefit, but if rates rise, you will be paying more. This should be taken into consideration when comparing rates against other products in the marketplace. You will also need to budget for increases in the BoE base rate.

Discounted Rates.

As with both Tracker and variable rates, your mortgage payments can fluctuate both up and down. The rate set is normally a discount off of the lenders standard variable rate. A discounted rate may provide an easier start but you will need to be prepared that you can afford the mortgage when this deal ends.

Watch Out!

Lenders offering special rates will do it for a reason. They are hoping that when the deal ends, you will stay with them out of loyalty, or simply forget to move mortgages.
Watch out for deals that lock you into a mortgage contract for longer than the deal and you may have an early redemption charge to leave. Some lenders may not let you port the mortgage if you are moving. Look for deal without an extended repayment term and that the deal is portable if you are planning to move prior to the end of the rate.
Factor in all the costs related to the deal and carefully check the Key Facts Illustration.