Type of interest rate deals |
How does it work |
Early repayment charges |
What does it mean for you? |
| Standard variable rate |
Your payments move up or down with the lender's own mortgage
rate, which is usually driven by the Bank of England's base
rate. |
Not usually, but check and see. |
- Usually you can leave your lender without any penalties
or problems.
- You're in control. You can usually pay back extra amounts
(and cut your interest costs) without a penalty.
- It moves with interest rates. So if interest rates go
up, so will your monthly payment.
- It will almost certainly be expensive compared to other
deals.
- The lender may not reduce, or may delay reducing, their
variable rate even if the Bank of England rate goes down.
|
| Tracker rate |
A variable rate loan with an interest rate that's at a set
amount above or below the Bank of England or some other base
rate, set independently from the lender. It tracks (moves
up or down with) that rate. |
Sometimes during any special deal period and maybe even
after the period too. |
- It can pay to go for a tracker if you can afford to
pay more when interest rates go up, in exchange for benefiting
when they go down.
- It's not a good choice if your budget won't stretch
to higher monthly payments.
|
| Discounted interest rate |
Your monthly payments can go up or down, but you get a discount
on the lender's standard variable rate for a set period of
time. At the end of the deal, you usually change over to the
standard variable rate. |
During the special deal: yes, almost always. They can apply
even after the end of the special deal period as well. |
- It gives you a gentler start to your mortgage, at a
time when money may well be tight. But you must be confident
you can afford the payments when the discount ends.
- The discount period is limited, so don't get used to
those early low repayments.
- You may not be able to make overpayments and pay off
the loan early without penalties
- The lender may not reduce, or may delay reducing their
variable rate even if the Bank of England rate goes down.
|
| Fixed interest rate |
Your payments are set at a certain level for an agreed period.
At the end of that period, they'll usually switch you to the
standard variable rate. |
During the special deal period: yes, almost always. They
can apply even after the special deal period, too. |
- Your payments will stay the same in that period, even
if interest rates go up.
- This gives you the security of knowing that you can
afford your payments and will make it easier for you to
budget.
- If rates go down, you won't benefit. Your payments will
stay at the higher rate.
- You may not be able to make overpayments and pay off
the loan early without penalties.
|
| Capped rate |
Your payments are variable and often linked to a base rate,
but fixed not to go above a set level (the 'ceiling' or 'cap')
during the period of the deal. At the end of the period, you
are usually charged the lender's standard variable rate. |
During the special deal: yes, almost always. They can apply
even after the end of the special deal period as well. |
- You know the maximum you will pay for a set period of
time.
- Useful if you want the security of knowing that your
payments can't rise above the set level, but still benefit
if rates fall.
|
| Collared rate |
May be used in conjunction with a capped rate or a tracker
(or both). Your payments are variable but will not fall below
a set level (the 'collar'). |
Not usually, unless it is used in conjunction with a capped
rate or a special-deal tracker rate (or both). But check and
see. |
- It may be part of another interest-rate deal which otherwise
appears attractive. But note that if the rate payable
is only just above the 'collar' and you think rates will
fall, you may not get the full benefit of a reduced payment.
|
| Source: Money Made Clear - FSA |
