Interest rate options...
Once you have decided if a repayment or interest only mortgage is the best option for you, you will need to decide how you'd like your interest calculated in the first few years:
You have the following options (click the relevant link below for more information).
| Discounted rate mortgage | Variable rate mortgage |
As the name suggests, this type of mortgage has a fixed interest rate and also over a set period of time. This is generally between two and five years, although longer periods are available. After this time the rate changes to the lender's variable rate.
If you're on a budget or you're worried about interest rate rises, you might find this the ideal mortgage for you as you will know exactly what your mortgage payments will be and over how long for.
However, fixed rates tend to have penalties for repaying the mortgage early. Having said that, some lenders will allow you to pay a certain percentage of the mortgage off each year without penalty.
The interest rate on a base rate tracker mortgage is linked to the Bank of England's rate and so will rise or fall as interest rates change.
These mortgages are usually cheaper than fixed rate mortgage and mostly have no repayment penalties and may be best for you if you are not too worried about fluctuations in rates. Therefore these are naturally popular when interest rates aren't expected to rise steeply.
If your budget is likely to be tight during the early period, perhaps the first 5 years of your mortgage, your adviser may suggest mortgage with its rate discounted off the standard variable rate mortgage for that period. There will often be a penalty for repaying the mortgage during the discounted period.
You will find that every mortgage lender has a variable rate, also known as a standard variable rate (SVR), with interest rates rising and falling as interest rates change in the market.
Whilst it is unlikely you'll choose the standard variable rate, you will automatically move to this rate after your fixed, discounted or capped period ends. If you find yourself paying the SVR it is generally worth reviewing your mortgage to see if you can save money.
