What are the different types of mortgage?

Before you apply for a mortgage make sure you understand all the options available.

Variable

Most mortgages are taken out at variable rates of interest. That means your lender sets an interest rate and from time to time this will be moved up and down in relation to general movements in interest rates in the wider economy. Variable rate mortgages are the most common mortgages offered in the home lending market.

Fixed

These offer borrowers a guarantee of what their mortgage payments will be for a set period of time. An interest rate which doesn’t vary can be convenient for budgeting. You, of course run the risk that mortgage rates could fall below the level of your fixed rate deal. But equally, you'll be protected if interest rates rise during the fixed term. These deals were popular in the UK in the early 1990's after consumers experienced very high home loan rates in the preceding three years. Fixed rate deals often involve the borrower agreeing to a penalty charge - often up to six months interest - if they decide to cash in the mortgage early.

In the UK most fixed mortgage rates are fixed for a period of 1-10 years, however in the USA it is normal for the rate to be fixed for the entire mortgage term.

Discount

In an increasingly competitive home lending market, there are a variety of offers which promise a discount off the prevailing variable interest rate. In other words, the interest rate on offer is set at a set margin below the standard variable rate.

This 'discount' may be for a number of years, but in some cases lenders have offered big discounts for short periods of time. e.g. 6% off your home loan rate for six months.

These offers are, in a sense 'too good to be true'. They invariably involve the borrower agreeing to stay with the lender for a period of time or face 'withdrawal penalties'.

Capped

This is a mixture of a variable and fixed rate mortgage. An interest rate is charged in line with current prevailing rates, but the borrower is given a guarantee that the rate will not exceed a certain amount. These offers are usually for a limited period of say three years. The advantage to the borrower is their mortgage rate can fall but there is a limit to how high it can rise in the event of mortgage rates in the economy turning upwards.

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