The Options for Paying Interest

Once you have decided how you are going to repay the mortgage, you need to choose a type of interest bill that will best suit you. The type of interest bill you choose can affect how long you are tied to the same lender and the kind of penalty fee you may have to pay if you move house or switch lenders in the future.

Standard Variable

All lenders offer mortgages where the interest is charged at their standard variable rate (SVR), which goes up and down in line with interest rates in general. In terms of monthly mortgage payments, it is unlikely to be the cheapest deal available, but there is usually no penalty to pay if you decide to switch your mortgage.

Discounted Variable

As the name suggests, with this type of deal you pay a lower than normal variable rate for a fixed period of time, which can be as little as six months or as much as five years. Some deals keep the same discount for that period, while others gradually reduced the discount each year. A discounted rate is worth considering if you don't mind that the your repayments will still rise and fall in line with interest rates in general, and you like the idea of paying less for your loan to begin with.

Base-rate Tracker

This is a variation on the standard variable theme. The differences is that the lender guarantees that the interest rate you pay will never be more than a fixed percentage above bank base-rate (the rate set by the Bank of England on which lenders base the rates they charge) and that changes in base rate will be passed on immediately. This is an advantage when interest rates fall, but not so good when they rise.

Fixed

With fixed-rate deals, the interest-rate you are charged is fixed for a set number of years – you are guaranteed to be able to pay that rate irrespective of changes in interest rates in general. At the end of the fixed-rate period, you revert to paying the lenders SVR. Fixed rates are ideal if you are on a tight budget and want the security of knowing that your mortgage payments won't go up and down for the first few years. However, you need to be aware that you are generally locked into a fixed-rate deal, so you won't benefit if there is a fall in interest rates in general.

Capped

With a capped-rate deal, the rate you pay is semi-fixed in that it is guaranteed not to go above a certain level - the 'cap' - during the period that the capped rate applies. With some deals, there is also a lower limit - the 'collar' or 'floor' - which means that the interest-rate you're charged cannot go below a certain level either. A capped-rate can be more attractive than a fixed-rate mortgage if you have some flexibility in your budget (allowing you to cope with limited rises and falls in interest rates) and you want the certainty of knowing that there is a limit on how much interest rates can go up and down.