Different Types of Interest Rates

There are a number of different interest rates available. Rather than asking ‘what’s the best option’, it is your own personal circumstances that will dictate which option is right for you.

Standard Variable Rate

This is where your monthly payments rise and fall in line with changes in the lender’s standard variable rate. The rate is set by your lender, and will usually follow the same pattern as the Bank of England Base Rate. However, it is important to note that it is up to the lender to decide on the rate, so falling interest rates may not necessary lead to your lender reducing their standard variable rate. In recent time, where interest rates have been falling, we have seen a number of lenders ‘holding back’, resulting in a bigger margin between the Bank of England Base Rate and their own standard variable rate.

To overcome this problem, some lenders will offer a variable rate which tracks the Bank of England Base Rate. The advantage of this is you are not at the mercy of the lender setting the rate. However, you need to be aware that when interest rates rise, so will your monthly payments.

Fixed Rate

As the name suggests, this is where your monthly mortgage repayments are fixed for a specified period of time. Regardless of changes in interest rates, you can be rest assured that your monthly payments will not change for the period of the fixed rate. The most common fixed rates will generally last for between 2 and 5 years, but there are options available for longer periods, sometimes even up to the length of the mortgage. Once the fixed rate has come to an end, your mortgage will revert to the lender’s standard variable rate. At this point, there are a number of options available to you – please refer to the section about remortgage options.

The advantage of this option is quite clear, in that you will have the security of knowing how much your monthly payments will be for the foreseeable future. This is great when interest rates are rising, but you may lose out in times of falling interest rates.

You should review your own circumstances before deciding on a fixed rate mortgage, and how long to fix for.

Discounted Rate

This is where you are offered a discount on the lender’s standard variable rate for an agreed timeframe. Although the rate will result in monthly payments below the standard variable rate, your payments will still fluctuate in line with the variable rate.

Tracker Rate

This is similar to a discounted rate in that the interest rate charged and your monthly payments will fluctuate. The main difference here is that the interest rate charged will be predetermined in that it will be at a set rate above or below the Bank of England Base Rate.

As with a discounted rate, this will result in lower payments when interest rates are falling, but higher payments when interest rates are rising.

Cashback Mortgage

This is where the interest rate payable is the lender’s standard variable rate but, as an incentive, the lender will offer a cash payment to the borrower on completion of the mortgage. This can be in the form of a flat amount or as a percentage of the total loan.

Capped and Collared

These options are used in conjunction with the lender’s standard variable rate, tracker rate or discounted rate mortgages. The ‘cap’ will dictate that although the mortgage rate payable can fluctuate, there will be an overall limit which the mortgage rate cannot exceed for the period of the capped rate.

Conversely, the collar rate will stipulate a ‘floor’ which the interest rate cannot fall below, again for a specified period.

The above advice was produced by Mr Manish Patel (BA hons), if you require any further information or have any questions regarding financial advice, please feel free to contact him. Email financial advisor

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