What types of interest rates are there? All possible types of mortgage interest rates

The interest rate determines the large majority of your mortgage cost, meaning the amount of money that you will give your lender on top of the capital sum that you have borrowed. This amount is the source of the lender's profit and his motivation for giving you the capital sum.

Most mortgage loans are paid back in monthly installments. The monthly installments consist of a part of the capital sum and the monthly interest calculated on the outstanding capital sum owed.

In order to attract costumers, lenders offer special deals for mortgages. Although usually there are other discounts bundled into special offers the most important element is the discount offered on the interest rate.

All lenders have a standard variable rate (SVR) that they, themselves set. The standard variable rate is calculated according to the base lending rate set by the Bank of England. The variable standard rate for most mortgagers in the UK is about 2% above the base lending rate. For example, if the base lending rate is 5% then the standard variable rate should be around 7%. The SVR is then used by lenders as a base for the deductions that are offered in different models by each lender.

With the exception, in some cases, of costumers with bad credit, all others can opt for one of the special offer packages that the lender offers. In the following, we will give a description of each type of special interest rate that you can have on any type of mortgage provided the lender offers it.

Be advised that each special interest deal is valid only for a specified amount of time at the beginning of the mortgage agreement after which the interest rate automatically reverts to a standard variable interest rate. At that point, it is wise to pressure your lender to apply another special offer or to switch your lender.

Changing your original lender with one that is willing to give you a discounted or fixed rate is only advantageous if the tie-in clause has expired, thing that usually happens at the end of the special offers with the exception of extended tie-in clauses. You can find out more about switching mortgagors and tie-in clauses in the other guides that we have prepared for you.

Variable Standard Interest Rate

The variable standard interest rate is the internal reference rate of interest that each lenders sets independently. This rate of interest is used to calculate all other discounted, fixed or capped interest rates that the lender might offer. Although you can opt for paying a variable standard interest rate there is no reason to subject yourself to such an unnecessary financial effort.

The only instance when this rate would be the only one available to you is when you have bad credit history and sometimes, not even then.

The only advantages of mortgages with variable standard interest rate is that in some cases they do not come with early redemption fees.

Fixed Interest Rate

A fixed interest rate is an interest rate that stays unchanged regardless of market fluctuation, but only for a certain period of time, from 1 to 5 years or more. The fixed interest rate should be a percentage lower than the standard variable rate. After the initial fixed interest rate interval has expired the interest rate reverts to the lender's variable standard rate.

The advantage of this type of interest rate is that you know what you will be paying in interest and you can plan your finances accordingly. One other advantage is that, if the variable standard interest rate goes up you will have saved some money in interest.

The disadvantage of a fixed interest rate is that if the variable standard interest rate goes down you will not be able to take advantage of the reduction.

Capped Interest Rate

A capped interest rate is a type of interest rate that fluctuates and has a maximum limit above which it can not go. In other words, the initial interest rate that you agreed upon with your lenders will go down but will only go up to a certain maximum level.

The advantage of this type of interest is that you can take advantage of interest rate drops and you can also plan your finances knowing the maximum costs of your mortgage.

The disadvantage of this type of mortgage interest rate is that the initial interest rate that you will pay will be higher than a fixed interest rate or a discounted interest rate.

Discounted Interest Rate

A discounted interest rate is a interest rate that, for the agreed period of time, will be a certain percentage lower than the standard variable interest rate. The discounted interest rate will fluctuate but the discount will be maintained over the course of any possible fluctuation.

The advantage of discounted interest rates is that regardless of market changes you will have a discount as long as the offer is valid.

The disadvantage is that you can be drawn to a lender with a significant discount rate and not realize that he has a high variable standard interest rate and can end up with not such a advantageous deal after all.

Base-Rate Tracker Interest

A base-rate tracker interest rate is a type of discounted interest rate that instead of being calculated as a reduction of the standard variable interest rate set by the lender it is a fixed increase of the base lending rate set by the Bank of England.

Daily Calculation Interest Rate

The daily calculation interest rate system is a system typically used for flexible mortgages for which you current account balance, that you can increase or decrease, is deducted from the outstanding capital sum after which the calculation of interest is done on the remaining amount.

This particular type of interest is only advantageous if you can foresee possibilities of overpayment and you wish to be able to use overpayment amounts as a financial reserve.

Since the interest of a savings account is lower than the interest you are charged on the outstanding capital sum it is advantageous to use a flexible mortgage as an option to a savings account.

The disadvantage is that with this type of mortgage and interest rate calculation method the applied interest rate, discounted or fixed is likely to be higher than a regular type of mortgage with discounted, fixed or capped interest rates.

Final Word

It is important to know all the options that may be available to you. Rather than surveying the market in order to discover the possibilities it is wiser and more lucrative to have a clear idea of all the possible combinations of mortgage types, attached interest rates and offers.

By being knowledgeable, you can build a model of the mortgage that perfectly suits you and then go about finding it. Most likely your mortgage will be easy to find once you have decided on a model, provided you have been realistic.

If you are not the average Joe and your lifestyle, financial possibilities and credit history is somewhat unusual do not be discouraged. There is a mortgage for everybody but sometimes your mortgage might be a niche one and it will take you a little bit more time to find.

Once you find a mortgage, by being mortgage knowledgeable it will be easy for you to spot the traps that could make you pay more than you have to and by understanding mortgages you will be able to negotiate to the possible extremes.

Because details are important in a mortgage agreement and even a small mistake or overlooked element could amount to losses of thousands of pounds over the life of the mortgage we advise you to spend as much time as you can to inform yourself by reading our informative guides and how-to guides or by referring to other resources.