There are several types of mortgage interest rates to choose from if you plan to apply for a mortgage in the United Kingdom. These are the standard variable rate, variable rate, fixed rate, and tracker rate. In addition, there are mortgages offered with a discount rate and capped rate.
A standard variable rate is offered by lenders to borrowers who choose a standard residential mortgage. It is a default variable rate type. With the variable rate type, the rate depends on the lender’s discretion. Borrowers who choose a fixed rate mortgage can rest assured that the rate will remain fixed or constant for a specified period of time. This period is usually between two and ten years. Mortgages that are offered with a longer term and fixed rate are often more expensive for the mortgage borrower. Not only is more money paid in interest but the mortgage may come with excessive early repayment charges. For this reason, short term interest rates are more popular among borrowers, compared to long term ones. Fixed rate mortgages are offered by many financial establishments in the UK, including NatWest, ING Direct, Nationwide, and others.
Another type of interest rate, which is a variable rate variety, is the tracker rate. As an alternative to fixed rate mortgages, this type of mortgage is popular among borrowers in the UK. The tracker rate basically follows the base rate of the Bank of England, as it changes in an upward or downward direction. The tracker rate is higher than the rate of the Bank of England, but it is also lower than variable rates offered by lenders. In may be set, for example, at one percentage point higher than the Bank’s base rate. When the base rate is set high, the tracker rate may be a fraction of a point lower than the base rate. The tracker rate is anchored to a prevailing interest rate, linked to the standard variable rates of lenders. It may be linked to different variable indices, for example, Libor, which is the rate set for banks to lend to one another.
The discount rate is another type of rate whereby the standard variable rate, which may be set at 2 percent, is discounted for a specified period of time. Most often, the period is between one and five years. The discount rate may be stepped as well, for example, it can be 3 percent during the first year, 2 percent during the second, and 1 percent during the third year.
Finally, there is the capped rate which bears similarity with the fixed rate, in that the interest rate cannot increase above a set cap. At the same time, it varies below the cap. If there is a collar linked to the capped rate, it will impose a certain minimum rate. The term of mortgages with capped rates is similar to that of fixed rate mortgages. It can be anywhere from two to five years.
Apart from interest rates, borrowers can choose from different mortgages, such as foreign currency mortgages, offset mortgages, right to buy mortgages, and a variety of others.