A lender’s basic mortgage will usually be at what’s called the standard variable rate of interest (or SVR) which goes up and down as bank interest rates change. But many lenders offer cheap rates or special deals which could mean that you have less to pay in the early years of your mortgage, for example:
Some lenders offer cashback deals where you get a percentage of the loan – say 5% – as a cheque to spend on your move or whatever you choose. But you may prefer not to go for this unless you really need the money, as the deal may tie you to the standard rate of interest for a number of years.
A ‘flexible’ mortgage gives you more freedom to repay at the speed you choose. You may be able to increase or decrease your monthly payments, building up credit you can draw on, or taking a payment holiday where you pay nothing for a few months. But you’re unlikely to get this flexibility and a very cheap interest rate.
Current account mortgages
A current account (or all-in-one) mortgage combines a flexible mortgage with a current account in one package. Money in your current (or savings) account can be set against the amount you owe on your mortgage or other borrowing, so that your interest payments are reduced.
These guarantee that the interest rate won’t change for a stated period – say, from two to five years. This means you don’t have to worry about increased payments in the first few years if interest rates go up. But if the lender’s standard rate falls below your fixed rate, you will lose out. You may be able to get a deal where you borrow part of your mortgage at the variable rate and part at a fixed rate – protecting you to some extent whether interest rates go up or down in the future.
With a discounted-rate mortgage, the interest rate may go up or down, but for a stated period it is always, for example, 1% lower than the standard rate.
With a tracker mortgage, the interest rate exactly follows the Bank of England base rate plus a specified percentage.
With a capped-rate mortgage, the interest rate is guaranteed not to go above a certain level during the capped period, often between three and five years.
Snags to watch out for
A cheap rate or a flexible deal may have strings attached, so ask your adviser or check the small print in advertisements. For example, the lender may require you to take out your house insurance or mortgage protection insurance through them. Or there may be a big redemption penalty (which could, for example, wipe out all the saving you made on a special deal) if you repay your loan early or switch to a better deal in the early years of your mortgage.