Options on Mortgage Interest Rates

Standard Variable Rate

This is an option you can take whereby your lender's base interest rate varies according to that of the European Central Bank. The monthly interest you pay will vary as the base rate varies. With this:

• You can switch your mortgage to another lender without penalty.
• If interest rates go up you will pay more, and if they go down you will pay less
• Normally, you can repay extra lump sums without penalty.
• The lender is not forced to reduce their rate, even if the ECB rate reduces.
• Such a mortgage interest rate option will generally cost more than other options.

Interest Tracker Mortgage

A tracker mortgage tracks the ECB rate, or any other rate set by a body other than the lender. The initial rate can be set above or below the ECB (for example) rate being tracked, but must vary according to it.

• If you can afford to pay more when interest rates increase, a tracker can pay you because you benefit when they go down. This is particularly true if interest rates are high when you arrange the mortgage.
• If you cannot afford to pay more than that originally arranged, don't take a tracker unless rates were abnormally high when you arranged the mortgage.

Discounted Interest Rate

With a discounted interest rate you are offered a discount on the standard rate that the lender is offering for a specific time period. The rate is still variable, and your monthly payments can change, and you will normally revert to the standard rate once the discount period is over.

• It allows you to pay less at the start of your mortgage period, when most people are earning less than they eventually will.
• It is likely that you will be penalized if you make extra payments to pay off the loan earlier.
• The lender is not forced to reduce the variable rate, or can delay reducing it.

Fixed Interest Rate Mortgage

Your interest rate is fixed for a period of time, after which it can be changed to the variable rate. Your payments will not change during that period, and you can plan and budget more securely than if your payments could vary with the base rate.

However, there is a trade-off: if you want to pay extra to clear the mortgage quicker, you will likely face a financial penalty.

Capped Interest Rate

With a capped rate, there is a ceiling above which the interest rate cannot rise. Other than that it is the same as a variable interest rate mortgage.

This arrangement applies for an agreed period, after which it normally reverts to the lender's standard base rate. It is advantageous when you need a secure fixed maximum payment for a period of time after taking out the mortgage, although you will still benefit if rates fall.

Collared Interest Rate

With a collared rate, your payments will not fall below a minimum amount. You can combine this with a tracker or capped rate, or any other mortgage interest rate deal, but are not the best deal if the rate payable is close to the collar.

The best deals are variable interest rates since they offer a greater degree of flexibility. You can pay ore if you want without penalty, and can even pay off your entire mortgage at any time or remortgage if needed. Just be aware that your repayments can vary upwards or downwards during the period of the loan.

Split Rate Mortgages

Not surprisingly, you can split your interest rate arrangement, and have part of it on a fixed rate and part on a variable rate.

This is useful if you want to go only part of the way on a variable or fixed rate mortgage. You pay the same each month for the fixed rate portion, while the variable portion changes according to variations in the mortgage rate. It's a comprise of sorts, and used by those unsure of what way the interest rates will move.