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Types of interest-rate deals

There are many types of interest rate deal, each with different pros and cons. What’s right for you depends on your individual circumstances.

Be aware that unless your interest rate deal is fixed, changes in the Bank of England’s interest rate may affect your lender’s rate, either directly or indirectly. The Bank of England’s rate is at a historically low level, but the Bank of England’s rate may rise and you may see your lender’s interest rate go up too. So it’s important to ensure you can keep your mortgage affordable both now and in the future – see How much can you afford and our Mortgage calculator.

Type of interest rate deals How does it work? Early repayment charges What does it mean for you?
Standard variable rate Your payments move up or down at the lender's discretion. Their decision may be influenced by changes in the Bank of England’s interest rate. Not usually, but check and see.
  • Usually you can leave your lender without any penalties.
  • You're in control. You can usually pay back extra amounts (and cut your interest costs) without a penalty.
  • It may be expensive compared to other deals.
  • If the lender decides to increase the rate your monthly payments will increase.
  • If the Bank of England rate goes up, your lender may decide to increase your rate. They will choose when and how much to increase your rate.
Tracker rate A variable rate loan with an interest rate that's equal to or a set amount above or below the Bank of England or some other base rate. It tracks (moves up or down with) that rate. Other base rates may still be influenced by changes in the Bank of England’s rate. At the end of the deal period, the lender usually charges you its standard variable rate. Sometimes during any special deal period and maybe even after the period too.
  • It can pay to go for a tracker if you can afford to pay more when interest rates go up, in exchange for benefiting when they go down.
  • It's not a good choice if your budget won't stretch to higher monthly payments.
Discounted interest rate Your monthly payments can go up or down, but you get a discount on the lender's standard variable rate for a set period of time. At the end of the deal, you usually change over to the full standard variable rate. During the special deal: yes, almost always. They can apply even after the end of the special deal period as well.
  • It gives you a gentler start to your mortgage, at a time when money may well be tight. But you must be confident you can afford the payments when the discount ends.
  • The discount period is limited, so budget for higher repayments.
  • You may not be able to make overpayments and pay off the loan early without penalties.
  • If the lender decides to increase the rate your monthly payments will increase.
  • If the Bank of England rate goes up, your lender may decide to increase your rate. They will choose when and how much to increase your rate.
Fixed interest rate Your payments are set at a certain level for an agreed period. At the end of that period, they'll usually switch you to the standard variable rate. During the special deal period: yes, almost always. They can apply even after the special deal period, too.
  • Your payments will stay the same in that period, even if the Bank of England’s rate or your lender’s other interest rates go up.
  • This gives you the security of knowing that you can afford your payments and will make it easier for you to budget.
  • If rates go down, you won't benefit. Your payments will stay at the higher rate.
  • You may not be able to make overpayments and pay off the loan early without penalties.
Capped rate Your payments are variable and often linked to a base rate, but fixed not to go above a set level (the 'ceiling' or 'cap') during the period of the deal. At the end of the period, you are usually charged the lender's standard variable rate.

Changes in the Bank of England’s interest rate may influence the lender’s rate. The impact depends on if it’s tracking a base rate or not.		 During the special deal: yes, almost always. They can apply even after the end of the special deal period as well.
  • You know the maximum you will pay for a set period of time.
  • Useful if you want the security of knowing that your payments can't rise above the set level, but still benefit if rates fall.
  • If the Bank of England rate goes up, you may see your monthly payments increase.
Collared rate May be used in combination with a capped rate or a tracker (or both). Your payments are variable but will not fall below a set level (the 'collar'). Not usually, unless it is used in combination with a capped rate or a special-deal tracker rate (or both). But check and see.
  • It may be part of another interest-rate deal which otherwise appears attractive. But note that if the rate payable is only just above the 'collar' and you think rates will fall, you may not get the full benefit of a reduced payment.
  • If the Bank of England rate goes up, you may see your monthly payments increase.
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