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all about mortgages: interest rates

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The amount of money that you eventually pay back on your mortgage is determined largely by the interest rates (its also influenced by whether you use a repayment or an interest only mortgage) . There are several different ways in which the level of interest might be set on a mortgage.

Variable Rate

This the mortgage companies plain vanilla option. The interest rate on the mortgage varies on the whim of the mortgage company. Usually it goes up when the Bank of England base rate goes up, and goes down when the Bank of England base rate goes down, but it doesn’t have to and there is often a lag - particularly if the base rate goes down.


This is a mortgage that explicitly tracks the Bank of England base rate, moving up or down in step. It is usually marketed at a certain percentage above or below the base rate, and may be offered for a fixed period of time (then reverting to a variable mortgage) or for the life of the mortgage.

Fixed Rate

This is quite a simple one. The interest rate on the mortgage is fixed for a set period of time. Fixes that are available range from 6 months to 25 years. Of the 2043 different fixed mortgage products that I found on moneybackmortgages, though 1986 were for terms of about 5 years or less - the market for a short term fix is very competitive in the UK, but not at all for a long term fix. There is generally a penalty for repaying the mortgage during the fixed period and sometimes afterwards. Once the fixed period ends the mortgage usually reverts to a variable one, but occasionally to a tracker.


This is simply the mortgage companies variable rate with a discount on the interest rate. So if the variable rate is say 6.99%, the discount rate might be 2.99% (a 3% discount). If the variable rate increases, say to 7.5%, then the discount rate increases to 4.5%.

Capped and/or collared

A mortgage is capped if the interest rate can rise but not above a certain level. It is collared if it can fall below a certain level. For example the mortgage may be offered at 6%, capped at 7% and collared at 5.25%. This means that the interest rate can vary at the will of the mortgage company, but will never go above 7% or below 5.25%. Mortgages are usually capped and/or collared for a fixed period of time and then revert to the standard variable rate.

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2 comments for “all about mortgages: interest rates”

  1. Great post, a lot of people don’t know all of the mortgage products available out there. Do they offer “Piggybak” loans in the UK? These are the 80/20 loans many people use to offset having to pay PMI. In some cases it turns out to be more expensive but noone wants to admit to their friends that they have to pay private mortgage insurance. Ego can be the biggest detriment to saving.

    Posted by Rad | July 3, 2007, 3:33 pm
  2. The standard deposit (downpayment) amount over here is 10% (not 20%) and if you have less than that you usually have to pay a Higher Lending Charge (same as PMI).

    Some mortgage companies don’t require it, you just have to weigh up the offer that you can get from them compared to offers with the Higher Lending Charge.

    In general I get the impression that there is more flexibility in the UK mortgage market (e.g. a greater variety of products) so most people find something to suit.

    Posted by plonkee | July 3, 2007, 5:20 pm

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