Choosing a Lending Rate

The most common options for choosing a lending rate are:

Variable Rate Mortgage

The interest rate charged will fluctuate in line with the base rate set by the Bank of England. Interest rates have in the past varied between 3% & 18%. Interest rates could rise to this level again.

a variable rate mortgage will suit you if:

You wish to pay off your mortgage early
You believe that mortgage rates will fall and want to benefit from the possibility of lower rates.

Capped Rate Mortgage

The interest rate is capped for an agreed period. If interest rates fall below the “capped rate” you pay the lower rate. If interest rates rise above the “capped rate” then you pay the (lower) capped rate.

a capped rate mortgage will suit you if:

You believe that mortgage rates will fall and want to benefit from the possibility of lower rates.
You have a tight budget
You do not plan to repay any part of your mortgage early. (During the fixed term period it is common to charge a penalty on any extra payments)

Fixed Rate Mortgage

The interest rate is fixed for an agreed period. This could be anywhere from one year to 25 years. If interest rates rose during this period, you would be the winner. If they fell, you would end up paying more than you needed to for your mortgage. A fixed rate mortgage gives you the security that your mortgage payments will not rise for a given period. If interest rates fall, the saving that you could have made becomes the price you paid for that security. If interest rates rise during that period of the fix you have got a bonus.

a fixed rate mortgage may suit you if:

You want to know exactly what you'll pay each month
You have a tight budget

You do not plan to repay any part of your mortgage early. During the fixed term period it is common to charge a penalty on any extra payments.