|  To mark the launch of our new sister site entirely dedicated to mortgages, we have put together a simple summary of the five main types of mortgage rate available to the UK borrower, as well as some of the pros and cons that apply to each type: 
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 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 amount. 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. Advantages: - 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.
Disadvantages: - Unless the variable rate is associated with a flexible mortgage, or some other form of specialist product, most borrowers will find that fixed or discounted deals usually offer more attractive rates.
- Variable rate mortgages offer unpredictable levels of monthly repayments, which do not allow new homeowners to accurately budget for their repayments.
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 years. 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. Advantages: - Fixed rate mortgages provide you with certainty - 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.
Disadvantages: - The peace of mind that fixed rates offer usually comes at a slight cost, in that the rates are usually slightly higher than with an equivalent discounted rate mortgage.
- If interest rates were to fall during the fixed period, your repayments would be locked in at a needlessly high level. For example last year, the MPC made 7 cuts to the base rate. Any mortgage customers whose rates were fixed will have missed out on the benefit of these successive reductions.
- Fixed rate mortgages 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.
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 Variable Rate.
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 it does so. Advantages: - 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 two percent far from uncommon in the current climate. 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 lenders has the security of knowing they will be able to charge you more if interest rates rise. You can also benefit from lower repayments if there is a fall in the base rate.
Disadvantages: - 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 after.
- The heavier the discounts, the more severe the jump in repayments when the discount period ends. 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. 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 or product.
Advantages: - Base rate tracker mortgages are often good for those who wish to keep the same loan product for the long term. While they don't necessarily have the up-front offers of some other product types (although this is becoming increasingly common), the long-term APR is usually pretty competitive.
Disadvantages: - 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.
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 thereabouts. The increasing sophistication of the mortgage market means that some capped rates can now be found with introductory discounts.
'Cap and Collar' mortgages are essentially 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. Advantages: 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. Disadvantages: 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. Get online mortgage quotes at our sister site: http://www.a-mortgages-website.co.uk
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