Guide on mortgage rates

Fixed Rate Mortgage

A fixed rate mortgage will guarantee the interest rate chargeable for an agreed period. The interest rate is set at the beginning of the mortgage and will not be affected by any subsequent changes in interest rates. Under a fixed rate mortgage the interest rate is set for a specified period, typically between 2 and 5 years. Once the agreed period ends, the mortgage interest rate will revert to the lender's normal standard variable rate at that time. Some lenders may offer a further fixed rate for another agreed period.

Standard Variable Rate Mortgage

This type of mortgage sets its interest rates in accordance with the lenders standard variable rate. If the rate increases or decreases during the lifetime of the mortgage your monthly payments will alter accordingly.

Base Rate Tracker Mortgage

Unlike an ordinary standard variable rate mortgage the Tracker tracks or follows the Base Rate set by Bank of England. This means all Bank rate cuts or increases are automatically passed on to the borrower. The difference between the Base and Pay rate remains constant for an agreed period and is normally far smaller than the mortgage on an ordinary variable rate.

Discounted Mortgage

A discounted mortgage will provide you with a guarantee that the interest rate charged to your mortgage will remain at an agreed percentage below the lenders normal standard variable rate, i.e. a discount, for an agreed period usually 1 to 5 years. This will mean that your monthly mortgage payments will vary during this period, but the interest rate you will be charged will always be discounted by the percentage agreed initially. Once the agreed period ends your mortgage will revert to the lender's normal rate.

Capped Mortgage

A capped rate mortgage is set at a rate of interest, above which the rate cannot rise during an agreed period, usually 1 to 5 years. However, should the lenders normal standard variable rate fall below the rate that has been set, then the rate of interest being charged will also reduce accordingly. Once reduced, this rate could increase if the lender's normal standard variable rate increases but will not increase above the rate initially set, i.e. the "cap".

Capped & Collared Mortgage

This type of mortgage is similar to the capped rate mortgage, except that there will be a minimum rate of interest set, i.e. "collar", below which the rate of interest will not fall.

Deferred Rate Mortgage

This arrangement requires only a portion of the interest charged on a mortgage to be paid for an agreed period, and the unpaid portion will be added to the mortgage balance. This means that for the agreed period you will pay a lower monthly payment, but the remainder will be added to your Balance, thereby increasing the amount you owe. At the end of the agreed period, the full monthly payment will be required on the new mortgage balance, that is the original amount plus the "deferred" amount of interest. The monthly payment you make after the initial period of "deferred" interest will be higher than that on a conventional mortgage arrangement, although the interest rate will be the same.

Cash Back Mortgage

This may be a fixed rate mortgage or a normal standard variable rate mortgage but with an incentive payment, often expressed as a percentage of the amount borrowed, made from the lender to the borrower following completion of the mortgage arrangements. Such payments are usually made in the form of a lump sum, but can be spread over 1 or 2 years. The payments called "cash backs" are treated as gifts and are normally subject to capital gains tax.

Flexible Mortgage

This is a method that allows you the flexibility of decreasing either the term or the quantum of your mortgage, by making overpayments to your lender at any time, without penalty. This may also allow you to borrow additional amounts from your chosen lender secured against the property, within certain confines, for a maximum amount usually agreed at the outset, this of course will increase your monthly payments or the term of the loan agreed at the outset.

LIBOR Linked Mortgage

LIBOR is the London Inter Bank Offered Rate and is the rate at which banks lend money to each other. LIBOR changes daily and a LIBOR linked mortgage will normally be adjusted every three months. LIBOR linked rates are usually quoted as X% above LIBOR.