Interest options
This content applies to England only.
Housing laws vary between England and Scotland. Get advice relating to Scotland
As well as repaying the capital sum you borrow, you will have to pay interest on the loan to the lender. There are deals which may mean you pay less interest to start with, but check the small print for any snags. Whether interest is charged daily, monthly or annually can also affect how much you pay altogether.
You can check how interest rate changes would affect the amount you have to pay using the Money Advice Service mortgage calculator.
Standard rates and special deals
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. It is not always easy to compare rates of different lenders, but the annual percentage rate (APR) of interest charged must always be shown in advertisements or leaflets. The APR gives a more accurate picture of how one mortgage compares with another.
The APR is higher than the SVR because:
- it includes one-off charges like arrangement and valuation fees
- it
takes account of any higher rates to be paid after the end of any
initial discount period.
Many lenders offer cheap rates or special deals. The deal you choose will affect:
- if and when the interest rate can go up or down after you've got your mortgage
- how
flexible the mortgage is if you want to vary your payments, or take a
payment holiday – to stop your payments for a few months.
Fixed-rate mortgages
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 variable 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.
Flexible and current account mortgages
Some lenders now calculate the outstanding balance (on which you pay interest) daily rather than monthly or annually. This is a good thing because it saves you interest in the long run (it's one of the requirements of a CAT mortgage).
Where lenders do this, you can often go for a flexible mortgage, which 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. However, you are unlikely to get both this flexibility and a very cheap interest rate.
A current account (or all-in-one) mortgage combines a flexible mortgage with a current or savings account in one package.
Other deals
- With a discounted-rate mortgage, the interest rate may go up or down, but for a stated period it is always, for example, one per cent 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.
- A capped and collared mortgage sets a minimum as well as a
maximum rate for this period.
If the rate is discounted for the first few years, the stated APR must take into account the higher interest rate for the rest of the term.
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. For example, the lender may require you to take out your home insurance or mortgage protection insurance through them. Alternatively 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.
