Interest Rate Deals

Types of interest rate deals

There are many types of interest rate deal, each with different pros and cons. What’s right for you depends on your individual circumstances.

Type of interest rate deals How does it work? Early repayment charges What does it mean for you?
Standard variable rate Your payments move up or down at the lender’s discretion. The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down. Not usually, but check and see.
  • Usually you can leave your lender without any penalties or problems.
  • You’re in control. You can usually pay back extra amounts (and cut your interest costs) without a penalty.
  • It moves with interest rates. So if the lender decides to increase the rate your monthly payments will increase.
  • It may be expensive compared to other deals.
  • The lender may not reduce, or may delay reducing, their variable rate even if the Bank of England rate goes down.
Tracker rate A variable rate loan with an interest rate that`s equal to or a set amount above or below the Bank of England or some other base rate. It tracks (moves up or down with) that rate. Sometimes during any special deal period and maybe even after the period too.
  • It can pay to go for a tracker if you can afford to pay more when interest rates go up, in exchange for benefiting when they go down.
  • It’s not a good choice if your budget won`t stretch to higher monthly payments.
Discounted interest rate Your monthly payments can go up or down, but you get a discount on the lender’s standard variable rate for a set period of time. At the end of the deal, you usually change over to the full standard variable rate. During the special deal: yes, almost always. They can apply even after the end of the special deal period as well.
  • It gives you a gentler start to your mortgage, at a time when money may well be tight. But you must be confident you can afford the payments when the discount ends.
  • The discount period is limited, so don’t get used to those early low repayments.
  • You may not be able to make overpayments and pay off the loan early without penalties
  • The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down.
Fixed interest rate Your payments are set at a certain level for an agreed period. At the end of that period, they’ll usually switch you to the standard variable rate. During the special deal period: yes, almost always. They can apply even after the special deal period, too.
  • Your payments will stay the same in that period, even if interest rates go up.
  • This gives you the security of knowing that you can afford your payments and will make it easier for you to budget.
  • If rates go down, you won’t benefit. Your payments will stay at the higher rate.
  • You may not be able to make overpayments and pay off the loan early without penalties.
Capped rate Your payments are variable and often linked to a base rate, but fixed not to go above a set level (the ‘ceiling’ or ‘cap’) during the period of the deal. At the end of the period, you are usually charged the lender’s standard variable rate. During the special deal: yes, almost always. They can apply even after the end of the special deal period as well.
  • You know the maximum you will pay for a set period of time.
  • Useful if you want the security of knowing that your payments can`t rise above the set level, but still benefit if rates fall.
Collared rate May be used in conjunction with a capped rate or a tracker (or both). Your payments are variable but will not fall below a set level (the ‘collar’). Not usually, unless it is used in conjunction with a capped rate or a special-deal tracker rate (or both). But check and see.
  • It may be part of another interest-rate deal which otherwise appears attractive. But note that if the rate payable is only just above the ‘collar’ and you think rates will fall, you may not get the full benefit of a reduced payment.

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