applying for a mortgage, consideration
needs to be given to the interest rate
and other charges which may be applicable.
are four main options with regard to mortgage
interest: fixed rate, capped rate, discount
rate and variable rate.
A fixed rate mortgage is when the repayable
interest remains at a fixed level for
a certain length of time, regardless of
market trends. At the end of the fixed
rate period, the interest rate is converted
to the lender’s standard variable
• A capped rate mortgage is when
a lender caps the repayable interest rate
at a maximum level; if the SVR drops below
the capped rate, the interest payable
is based on the lower variable rate whereas
if the SVR rises above the capped rate,
the interest payable is based on the capped
rate, and not the higher SVR.
• A discount rate mortgage features
a variable interest rate, but with a fixed
discount for a certain period of time
e.g. a variable rate of 5% with a discount
of 2% means that the interest payable
is 3%. The discount value of 2% remains
constant regardless of the variable rate.
• A variable rate mortgage features
interest rates that are constantly varying
in accordance with market conditions.
Redemption and No Overhang
redemption” applies to a mortgage
for which there is no early redemption
charge, allowing the borrower to repay
the mortgage in full at any time. “No
overhang” applies to a mortgage
with an early redemption charge lasting
for no longer than the fixed, discount
or capped periods of the mortgage. The
borrower may complete repayment of the
mortgage after this period without penalisation.
A disadvantage of these schemes is that
the interest rates offered by lenders
are not usually very competitive.