As a borrower, you should understand the type of mortgage product you are signing up for. The product names often reflect the terms upon which you pay interest on a mortgage. Interest is charged as an annual percentage of the amount you originally borrowed. For example, if you borrowed £100,000 at an interest rate of 6 per cent for a year, you would have to pay £6,000 interest. Lenders often call this the APR or annual percentage rate.
Every mortgage lender has a standard variable rate, or SVR, of interest upon which it bases all of its mortgage deals. The standard variable rate is, in turn, based on the Bank of England's base lending rate and this is decided at monthly meetings of the Bank's monetary policy committee (MPC). Lenders do not have to charge the same as the Bank of England.
The interest rate (and often the mortgage product name) can be one of the following:
Standard Variable Rate (SVR): The SVR is the lender's standard rate, which they can change at anytime. With a variable rate mortgage you are able to switch lenders at any time without being penalised.
Fixed Rate: A fixed rate mortgage allows you to repay interest at a fixed rate, irrespective of any base rate fluctuations. This means your monthly repayments will remain the same every month for a time period agreed between you and your lender, which is often between 1 and 5 years but could be longer. After the agreed period, the interest rate usually reverts to the lender's SVR.
Tracker: A tracker mortgage will track any movement in the Bank of England Base Rate, so you will benefit from any falls in interest rates, but will also have to pay more each month should the rates increase.
Discount: The discount mortgage rate is another variation of the standard variable rate. It provides a discount from the lender's SVR for a certain period of time. The interest rate still fluctuates, meaning your monthly repayments may differ slightly from month to month, but the discount remains constant.
Capped: This is an interest repayment variation. You agree to have a limit - a cap - on the maximum amount of interest you will pay over a particular period of time while allowing it to fall if the variable rate drops.
Some mortgages have early repayment charges so you need to be sure this is suitable for you for the foreseeable future. Furthermore, the lender may also charge a 'booking/arrangement fee' to apply for certain types of mortgage. You should ask your adviser to explain these in more detail, or ask for an illustration.
Products come and go on our market regularly, so if we haven't covered it here, rest assured we'll know about it, so just ask