There are four main types of interest payment on either interest only or repayment type mortgages. On this page we will explain the workings of each of these interest charges.
- Fixed Rate
- Variable Rate
- Capped Rate
- Discount Variable Rate
Fixed rate - Fixed rate mortgages have an interest rate that remains the same for a period of time - usually between 1 and 5 years. After this period of time the interest rate reverts to a variable rate. The fixed rate is usually at a discount as an incentive to take out the mortgage.
The advantage of fixed rate mortgages is that there are no surprises for the duration of the fixed rate. The downside to this type of mortgage occurs if the Bank of England base rate or LIBOR rate falls, in which case you could end up paying more than you would have with a variable rate mortgage. Also if you want to leave before the agreed term the early redemption penalty is usually significant. For example you may be charged six months gross interest if you leave a five-year fixed rate agreement.
Please visit our Mortgage Tools pages to see some examples of this type of mortgage.
Variable Rate - with a variable rate mortgage is where the interest rate varies according to the Bank of England base rate or the LIBOR rate. A lender's variable rate is set above the base rate by usually 1 or 2%.
With this type of mortgage the upside is the same as the downside; the interest rate can go down, saving you money, or up, in which case your interest payments increase.
Please visit our Mortgage Tools pages to see some examples of this type of mortgage.
Capped Rate - With a Capped rate mortgage the amount of interest you pay can go down if the variable rate falls but cannot go above a predefined maximum. The advantage is that the rate can never go too high and if the rate falls then you pay less.
The disadvantage of this type of mortgage is that there are only a limited number of these deals on the market and they can be less competitive than fixed or variable rates. There is also often an administration charge.
Please visit our Mortgage Tools pages to see some examples of this type of mortgage.
Discounted Variable Rates - As the name suggests, to tempt new customers, lenders will offer a variable rate at a reduced initial rate or below their standard variable rate. After the agreed period, again one to five years typically, the rate reverts to the lender's standard variable rate.
The interest rate during the discount period will go up and down in line with the standard variable rate. Disadvantages of this type of mortgage are obviously that the rate can go up and there are penalties for leaving early. It is possible that penalties may be charged for a period longer than the discount period. This is called overhang.
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
