A guide to mortgage rates in the UK
Standard Variable Rate (SVR)
The simplest and most straightforward option. Each lender offers an SVR which tends to follow the Bank of England interest rate, known as “base” rate.
SVRs are generally a percentage point or so higher than base. As the base rate shifts up and down so lenders move their SVRs, although not always by the same amount; and by not quite making it in-line e.g. they only drop rates by 0.2% when the base rate drops by 0.25%, they increase their profits.
Good Points : straight forward
Bad Points : If you’re on the lenders’ SVR you are almost certainly paying much more than you need to, not only that but there’s no guarantee you’ll get the full benefit of all rate changes.
Fixed Rates
With a fixed rate mortgage, you will pay a fixed rate for an agreed time at the start of your mortgage. Ideally if you want guaranteed protection from possible interest rate rises for a set period. fixed rete mortgages are usually arranges from any where between 1 - 5 years from the start of your motgage and are renewable at the end of each agreed period.
So should you opt for a fixed rate and if so what are the catches to watch out for? The decision you make here will normally depend on two factors. The first is what you feel will happen to interest rates over the coming months/years and secondly your approach to risk.If you feel that interest rates are likely to fall then it is unlikely that you will want to tie yourself in to a fixed rate for any period, particularly if you feel that the normal variable rate is likely to fall below the fixed rate. You will probably feel more inclined to take a discounted rate in these circumstances as you can then benefit from any fall in interest rates with a reduction in your mortgage repayments.
The second factor to consider is your attitude to risk. If you like to budget with certainty then you will probably want to fix your repayments for a reasonable length of time. Equally important is the amount of leeway you have with your budget and whether you can afford to meet any increase in repayments. If you are a first time buyer and have borrowed to your maximum limit then it is probably sensible to fix your repayments at a level which you can comfortably afford. If there is little 'slack' in your budget then you must consider 'can I really afford to take a chance on interest rates rising?'
Good points: You know what your mortgage will cost. Your payments will not go up no matter how high rates go for the term.
Bad Points: Rates are usually higher than on discount products and if interest rates fall you will not see your payments drop meaning you could end up paying more backthan the valu of the property.
Capped Rates
Part variable rate, part fixed rate. The rate you pay moves in line with the base rate but there is an upper ceiling or “cap” which gives you some protection. These mortgages tend to be popular when people are frightened that rates might soar.
A capped rate will give you the best of both worlds between a fixed rate and a variable rate. The cap is basically a ceiling on the interest rate above which it will not rise. If the normal variable rate falls below the capped rate then the variable rate will be charged. You have a guaranteed maximum rate with the benefit of a reduction in interest rate if this happens. However, you will usually find that the cap is set at a higher rate than the best fixed rates, you also need to watch out for redemption penalties. One to watch out for with this rate is 'cap and collar' products. This means that, as well as the capping on the interest rate above which it cannot rise there is also a collar on the rate which is a level below which the rate cannot fall. This means that if the normal variable rate falls below the collared rate you will be paying 'over the odds'.
Good Points : You benefit from interest rate falls and have some protection from interest rate rises.
Bad Points: The “cap” tends to be set quite high, and the starting rate is generally higher than normal variable and fixed rates.
Discounted Rates
Discounted rates are usually linked to the normal variable mortgage rate but with a discount for a set period of time. This means that the interest rate you are paying will fluctuate up and down in line with base rates but you will be guaranteed to receive the discount for a set period of time.
Most of the discounted rates on offer will give the discount over the first one, two three, four or five years. The total amount of discount on offer tends to work out approximately the same over the period of the discount so you are making a choice between a large discount for a short period of time, a small discount over a long period of time or something in between.
There are a few products that will offer the discount over a shorter period than one year and a few that will offer the discount spread over a longer period. There are even some lenders who will guarantee you a discount for the life of the mortgage and these products are certainly worth considering if you are not looking for a substantial reduction in your repayments over the short term.
You should probably avoid discounted rates if you are on a very tight budget unless you feel absolutely certain that interest rates will fall and remain low for the foreseeable future. However, if you are budgeting with a reasonable amount of leeway and you feel it is likely that rates will fall then a discounted rate could be just the thing for you and may save you a considerable amount of money over the early years of the mortgage.
Good points: Cheaper than the SVR.
Bad Points: The discount tends to lasts for a relatively short period
Stepped Rates
A stepped rate may be either fixed or discounted. The term 'stepped' simply means that the rate will change in steps at certain fixed intervals. For example a stepped fixed rate may offer a rate of 3% in year 1, 4% in year two and 6% in year three - in this example therefore you have a fixed rate for three years which increases in these three stages. An alternative to this may be stepped fixed rate where the interest rate decreases over the term of the fix. For example the rate may be 7% in year one, 5% in year 2 and 4% in year three. In this case the interest rate is again fixed for three years but at the three different steps.
A stepped discounted rate will work in a similar fashion to the above but instead of the interest rate itself being fixed, the amount of the discount will be set. Again the size of the discount may step up or down over the period according to how the lender has chosen to structure the product. For example you may be offered a discount of 3% in year 1, 2% in year 2 and 1% in year three. Alternatively the step may be set in reverse with 1% off in year one, 2% in year two and 3% in year 3.
Stepped rates have the same disadvantages and advantages of the fixed and discounted rate products and are simply a variation on the same theme. Again you should watch out for early redemption penalties.
The stepped rate market is smaller than the conventional discounted or fixed rate market and fewer products are launched in this format. However, it is one that you should be aware of and one that will suit some people. Obviously individual circumstances and requirements vary considerably and these products will appeal to some people, particularly if they can see the stepped rate fitting in with planned changes in income.
Cash-back Deals
With a cashback mortgage, your lender gives you cash back - typically a lump sum worth 5%, although there have been deals offering to 10% of your loan. Cashback mortgages charge higher rates than standard deals and charge you penalties if you want to repay or switch your loan within a set period, usually 5 years. Basically your lender takes its cash back.
Good points: You get a cash lump sum.
Bad points : You pay for it with higher interest rates and early repayment charges