Scheme

How it works

Penalties

Is it for you?

Variable Rate

The monthly payment will fluctuate in line with the lender's prevailing interest rates.  A variable rate will often have no (or very low) early repayment charges and may be suitable if you want the flexibility of repaying your loan early.

If a “cash-back” scheme is offered there is likely to be an early repayment charge.

Yes, if you can afford to pay more when rates increase.

No, if during the early years you would be unable to cope with increased repayments due to rising interest rates.

Capped Rate

A capped rate allows you to budget maximum monthly costs for the scheme period whilst taking advantage of interest rate reductions if they occur.  In other words, the interest rate will not rise beyond the level of the “cap” but could come down below the cap level if rates fall.

At the end of the capped period the loan usually reverts to the variable rate at that time

A capped mortgage may therefore suffer fluctuations dependent upon interest rates.

A variation is the cap and collar mortgage.  This will restrict the lower level of interest rate that could be applied to the mortgage if interest rates fall.

There will usually be an arrangement fee and early repayment charges if the loan is repaid in the early years – even after the end of the fixed rate period.

If you want a maximum interest rate that could be applied to your mortgage but want to take advantage of possible falling rates a capped rate may be worthy of consideration.

Fixed Rate

Fixed rate loans allow you to budget your mortgage costs for a set period.  At the end of the fixed period the loan usually reverts to the variable rate at that time.

There may be an early repayment charge if the loan is repaid in the early years – even after the end of the fixed rate period.

If you think interest rates are likely to fall a fixed rate mortgage could be less appealing (dependent on the rate offered).  Conversely, if you are worried about rising interest rates or require certainty of cost then a fixed rate could be attractive. 

Discounted Rate

A discounted rate enables you to reduce your monthly costs for a set period.  The discount will be usually calculated as a % off the lenders standard variable rate.  At the end of the discount period the loan usually reverts to the standard variable rate so your monthly costs will go up. Allowances should be made for this in future budgeting. 

There may be financial penalties if the loan is repaid in the early years – even after the discount period.

A discounted loan will fluctuate up and down in line with interest rates. If you want to be able to budget exactly for your mortgage payments in the early years a discounted rate may not be suitable for you.

Base Rate Tracker

Tracker schemes are becoming more popular.  A tracker rate will be directly linked to the Bank of England base rate and typically will be a % above that for a set period – which usually translates into a discount.

Typically there will be a penalty in the initial period.

A tracker rate will fall immediately in line with base rate changes, but the rate will also rise in line with base rates.