UK mortgage interest rate options
Once you’ve decided on whether you are going to make payments on
the capital or not, you need to turn your mind to interest rate options.
There are many different ways of calculating the interest due – all of
which have their advantages and disadvantages, depending on your
circumstances. Add to this a number of other special types of mortgages
– and you have a lot to choose from. Take a look at our current
mortgage rates for a list of the ‘Best Buys’ in each of the
Variable Rate Mortgages
A variable rate mortgage is one that reacts to changes in the Bank
of England base rate, or some other index that is used as a
benchmark. As such, the majority of all interest rates can be
broadly classed as variable rate mortgages.
However, when people talk about variable rate mortgages, most are
referring to products that charge a particular lender’s Standard
Variable Rate (SVR) of interest.
The SVR is the rate of interest upon which most other products on
offer from a particular lender are based. More often than not, a
lender’s SVR is itself linked to the Bank of England base rate,
though it is usually set at a level of the base rate plus a certain
number of percentage points. When the base rate changes, the lender
reacts by making a corresponding increase or decrease to its own
SVR, though not all lenders will alter their SVR immediately every
time the base rate changes, or necessarily by exactly the same
Certain mortgages will require the borrower to pay the lender’s SVR
on the full balance of a mortgage from the outset. Others will
revert to the SVR on completion of the introductory fixed,
discounted, or other form of offer period.
SVR mortgages are more widely available than any other type of rate.
Borrowers looking for adverse credit, buy to let, let to buy,
self-build, 100%, cashback or self certification mortgages may find
that they do not meet the lending criteria that would enable them to
take out some of the more competitive offers available on the
market. The sheer volume of mainstream and specialist lenders
offering SVR products means that they are more likely to be able to
find this type of mortgage.
SVR mortgages usually offer virtually unrestricted movement,
particularly when a customer is paying the SVR having previously
been on some form of introductory offer. Most customers of this type
will be able to move to another mortgage product or a different
lender without fear of being hit with redemption penalties. However,
this is not always the case, as some products have redemption
penalties that last beyond the offer period or that are payable for
an extended period of time due to particularly relaxed lending
criteria, cashback deals, or some other reason.
Although this type of mortgage is the most common type of rate in
this country, it is certainly not a type of product that is suitable
for everyone to take out at the start of a mortgage term. Unless it
is associated with a flexible mortgage, or some other form of
specialist product, most borrowers will find that fixed or
discounted deals usually offer far more attractive rates.
Furthermore, SVR mortgages offer unpredictable levels of monthly
repayments, which do not allow new homeowners to accurately budget
for their repayments.
However, if you eventually want to pay your mortgage off and avoid
remortgaging forever, it is inevitable that you are going to have to
content yourself with paying a lender’s SVR at some point in the
future. So if you are looking for a long-term deal, it is important
to make sure that your lender has a good track record of offering a
competitive Standard Variable Rate.
Fixed Rate Mortgages
Fixed rate mortgages guarantee a specific rate of interest for a set
length of time. Most commonly, this is for between one and five
years, though it can be as long as ten, fifteen or even 20 years.
As a rule, the longer the fixed period, the higher the rate of
interest will be. A lender will not want to commit to lending you
money at a really low interest rate for ten years, when there is a
fair chance that during that period the general level of interest
rates may rise above the rate at which they are lending you money.
Therefore, among fixed rate deals, the lowest interest rates are
usually to be found with deals that are fixed for one, two or three
It is also possible to find stepped fixed rate mortgages, where the
interest rate is, for example, fixed at one level for one year and
then a slightly higher level for two further years.
One of the best things about fixed rate mortgages is that they
provide you with certainty in an uncertain world. Whatever happens
to the economy and irrespective of any changes in the Bank of
England base rate or the lender’s own SVR, the interest rate payable
on your mortgage will stay the same during the fixed period. This
makes it much easier to budget for the costs of home ownership with
a fixed rate mortgage than it is with any other type of rate, as you
can be sure that your repayments will stay the same for a certain
period of time.
A good time to buy a fixed rate mortgage is often when the base rate
is at a historically low level, or when there is a strong
possibility that the Bank of England Monetary Policy Committee (MPC)
will raise the level of interest rates at some point in the not too
distant future. Your repayments would be protected against any
increase in lending rates that followed a base rate rise – something
that would not be the case had you opted for a discounted rate
Although fixed rate mortgages give you security that your repayments
will not rise, this peace of mind usually comes at a slight cost, in
that fixed rate mortgages are often offered with marginally less
competitive rates that an equivalent discounted rate mortgage.
Furthermore, you could potentially be locking your repayments at a
needlessly high level were interest rates to fall during the fixed
period. Take the year 2001 for example. During the course of the
year, the MPC made 7 cuts to the base rate, a pattern that was
mimicked by the majority of lenders with repeated cuts in their
lending rates. Any mortgage customers who fixed their rate of
interest at the start of 2001 will have missed out on these
successive reductions and are probably still paying a rate of
interest that is considerably higher than that which is available to
Of course, customers that are stuck paying an uncompetitive fixed
rate of interest could always switch to another product or
remortgage with a different lender. But another feature of fixed
rate mortgages is that they normally tie the borrower into the deal
with expensive early redemption penalties that become payable should
the customer wish to change mortgages within the fixed period.
This is understandable and acceptable to most people, as long as the
redemption penalties are only payable for the duration of the fixed
period. However, some of the most competitive fixed rate mortgages
have a redemption penalty overhang or ‘extended tie-in’. This is
where the redemption penalty continues beyond the fixed rate period,
effectively tying you in for a longer period. At the end of the
fixed period, the rate of interest payable will revert to the
lender’s Standard Variable Rate, which is usually much higher than
that rate you were previously paying.
A final point that you need to be aware of, which is a feature of
all mortgage rates that come with some form of introductory offer,
is the possibility of an interest rate shock at the end of the fixed
rate period. This is simply where your mortgage repayments jump
upwards from one month to the next due to the higher rate of
interest payable on your loan after the end of the introductory
period. With a fixed rate mortgage, this phenomenon can be made all
the more difficult financially if the base rate and subsequently the
lender’s SVR have climbed during the fixed period, making the hike
in repayments all the more severe.
Discounted Rate Mortgages
With a discounted rate mortgage, the Standard Variable Rate of a
lender is temporarily reduced by a set amount for a specified
period, usually from one to five years. Once the discounted period
is over, borrowers then revert to paying the prevailing Standard
With this type of mortgage, it is the discount that is fixed and not
the actual rate payable. An example is a rate that is guaranteed to
have a 1.75% discount from the SVR for 3 years. If the Bank of
England base rate rises or falls and the lender follows suit with
their own SVR, your discounted rate will also change accordingly.
It is quite common to find mortgages with a number of steps in the
discount. You may find that you start out paying a significantly
reduced rate for six months. The discount is then reduced, so your
rate rises slightly. Following a second period of a lesser discount,
the rate usually reverts to the SVR, but there may even be a third
step in the discount before doing so.
Some of the most competitive initial rates are to be found with
discounted mortgages. The discounts can be quite substantial, with
introductory rates as low as one or two percent far from uncommon.
This can be incredibly useful if you are going to have a lot of
other expenses once you have bought your house.
The initial rate is often slightly lower than with an equivalent
fixed rate product, since the lender has the security of knowing
they will be able to charge you more interest if the Bank of England
raises interest rates.
Finally, with a discounted rate of interest, you can benefit from a
fall in the base rate – unlike a fixed rate, you will enjoy lower
repayments when the lender lowers their SVR.
Unlike a fixed rate, you don’t have any control over how high your
rate can go. There is nothing to say that the MPC won’t make half a
dozen rate increases within a 12 month period, and if base rates
start to spiral, your interest rate will be sure to follow soon
The heavier the discounts, the more severe payment shocks when the
discount period ends and the monthly repayments jump by a large
amount to match the SVR. You must be sure that you can budget for
this in your monthly expenses.
Discounted mortgages almost always have heavy redemption penalties
for the duration of the discounted period. The penalties can be
stepped as well as the discount, so that you get added punishment if
you wish to change your mortgage during or immediately after the
period of greatest discount.
As with fixed rate mortgages, the early redemption penalty can
overhang the duration of the discount period, especially with those
products with extremely competitive initial discounts.
Tracker mortgages are increasingly common. They are usually linked
to the Bank of England base rate, in that you pay a set margin above
the current base rate level. Unlike many of the other types of rate,
most tracker rates will not revert to a lender’s SVR at any point
during the life of the loan. They will continue to track the base
rate until you have either paid off your mortgage or switch provider
There is no need to rely on your lender cutting rates in line with
bank base rates, which some don’t necessarily always do immediately
after an interest rate decision.
Your mortgage will never revert to the SVR, so you have some
security in that you will never be paying a highly uncompetitive
It is quite common to find tracker mortgages that have discounts and
stepped discounts built into them, providing an added benefit. You
may, for example, pay 0.75% below the Bank of England base rate for
1 year, after which time the rate is guaranteed to be not more than
1.75 % above the base rate for the remaining duration of the loan.
As with other stepped products, there can be numerous steps in the
discount before it settles at the final level and while pure tracker
mortgages may be free of redemption penalties, those with discounts
attached will almost certainly not be.
As with other variable rates, you can be in for a rough and
unpredictable ride, particularly if the MPC were to make a series of
rate increases. Any volatility in interest rates makes it difficult
to budget for mortgage repayments, thereby making this type of rate
unsuitable for some borrowers.
Capped Rate Mortgages
As with all variable mortgages, the interest rate on a capped
mortgage follows the lender’s SVR up and down. The difference with
this type of mortgage is that the rate is guaranteed not to go above
the level at which it is ‘capped’. This cap will not last the entire
life of the mortgage, but it is common to find rates that are capped
for five years or more.
This type of mortgage is particularly popular in times where
interest rates may be likely to rise, since they offer protection
against repayments going above a certain level. This makes capped
rate mortgages almost as attractive as fixed rate mortgages to those
borrowers who are keen to set their repayment budget for a specific
period of time.
While capped rates prevent repayments rising above a certain level,
they still allow you to enjoy the benefits of any cuts that the
lender makes to its SVR. A capped rate mortgage does not deny you
the savings that arise from falling rates. Furthermore, it is
possible to find capped rate mortgages that also come with an
initial discount in addition to the cap.
Despite the availability of discounts in conjunction with a cap on
the interest rate, the rate is usually higher than comparable fixed
rate or pure discounted products. So although they are a safe choice
of mortgage, they are a fairly conservative one, as you will never
have the cheapest rate available on the market. If rates go as high
as, or above the level of your cap, you would have been better with
a rate fixed at a lower level. If rates drop or stay below the cap,
a discounted rate will normally be better value than a capped rate.
This type of mortgage also often has redemption penalties, sometimes
with an overhang beyond the capped rate period.
Cap and Collar
This is the same as a capped mortgage, but with a lower limit as
well, meaning that your bets are hedged in both directions. The
mortgage rate is therefore guaranteed to be within a set margin for
the duration of the cap and collar period.
Like a capped rate product, this is a safe and risk-free type of
mortgage. Although the rate may be marginally cheaper than a capped
rate (but still less competitive than an equivalent fixed or
discounted product), you are losing some of the potential gains if
interest rates drop, since the rate you pay will not go below the
Cashback mortgages provide you with a single lump sum of cash either
immediately on completion of the mortgage transaction or after the
first monthly repayment.
The amount of the lump sum is usually calculated as a percentage of
the overall loan amount, though it can be a set figure. Some lenders
offer a sliding scale of cashback, depending on how long borrowers
are willing to tie themselves in to the deal. Although cashback
amounts in the region of 1 to 3% are fairly common, the percentage
of the loan that is given as cashback can be as high as 10%. Such
seemingly great deals don’t usually come without strings attached
however, usually in the form of very severe early redemption
penalties that may well involve the repayment of some, all or even
more than the cashback value.
It is quite common to find mortgages that include a relatively small
cashback element, possibly in the region of £200 to £300. This can
be a cash sum for you to spend as you wish, though it sometimes has
a specified purpose, such as covering all or part of your solicitor
fees. This type of cashback deal does not usually have such severe
penalties and may well not be advertised as a cashback mortgage.
Various different types of rate can come with cashback – capped,
discounted, fixed and variable, with cashback products usually
available for both mortgages and remortgages. It is not common to
associate cashback schemes with UK-based foreign currency mortgages,
tracker mortgages or other non-standard loans.
Cashback schemes can be useful for buyers who need to have funds
available more or less immediately after the mortgage is completed.
Although most cashback deals are open to all borrowers, one group
with whom they are particular popular is first time buyers. The
cashback sum is often used to buy furniture, fittings and other mod
cons that they may not already have, or used to cover the cost of
stamp duty, surveys, legal fees or other such incidentals.
The rate of interest is likely to be higher than for non-cashback
equivalents, since the lender will seek to recoup the cashback sum
over the life of the loan by charging you more for the privilege of
borrowing the money. By opting for a cash bonus, you will normally
be giving up the option of a competitive fixed rate or a hefty
It is often the case that the higher the cashback the less
competitive the rate of interest, either during any discount period
or once the mortgage reverts to the lender’s SVR. The more the
lender gives you up front, the more they will need to charge you to
make the money back in the long term. When you take into account the
build up of interest over time that the higher rate will accrue,
this form of mortgage often proves to be relatively inefficient.
Cashback mortgages almost always carry early redemption penalties.
If you try to pay off the mortgage within the penalty period,
whether by selling your home or remortgaging, you may have to pay a
fairly substantial sum of money back to the lender. Some lenders
operate a sliding scale of penalties, which decrease each year, or
in steps, while others will charge the same penalty for the entire
early redemption period.
The size of the cashback sum is often linked to the percentage of
the property value that a customer is seeking to borrow. Some of the
largest cashback deals are available only to those borrowers with a
75 percent deposit. Where this is the case, it can be cheaper in the
long run to go for a more competitive non-cashback loan worth a
larger percentage of the property value and hang on to some of the
cash that was otherwise earmarked for the deposit. Where a lender
operates such an incremental cashback scheme, the same reasoning
applies at higher loan-to-value amounts.
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