A mortgage rate is the amount of interest that is charged on a monthly basis on your mortgage agreement. There are many ways that your mortgage rates can change depending on what type of financial commitment you have undertaken and with which lender. There are many ways that you can pay the interest on a mortgage and it is most likely that you would want to choose the option that allows you to have the least possible cost. During this article we will take a look at the different types of mortgages available and how each one calculates the mortgage rates over the term of the agreement.

The first option that is available to you is the fixed rate mortgage; this basically does exactly what the title says and has a fixed rate of interest for the duration of the mortgage agreement. The term of the mortgage agreement could be anywhere from five years, ten years or it is possible now to get a fixed  rate mortgage for the complete duration. This type of mortgage is particularly common for people who are undertaking one for the first time. Often when taking the first steps onto the property ladder it is hard financially, a fixed rate mortgage gives the assurance that no matter what happens with the base rate of interest the payments will still be the same for the duration that the mortgage agreement has been signed for. There are of course pitfalls with a fixed rate and if the base rate of interest falls then you could be paying higher repayments than people on a more variable mortgage option. It is important to weigh up the risks against the certainty that you know exactly what your repayments will be each month.

Another mortgage option is the variable rate; this is the general rate of interest that a lender will use to calculate your repayments. The variable rate is linked to the base rate of interest that is calculated by the Bank of England and will move up and down in line with this. With these kind of mortgage rates you are at the mercy of the economy and external factors which could push your mortgage upwards in cost per month. The standard variable rate mortgage is one of the most common types and all mortgages usually end up using this form of interest payment. In general the mortgage lenders always have their rate of interest above the base rate of interest; this will be around two percent higher. Therefore with current interest rates set at 5.25% then it could be likely that anyone on a standard variable rate will have interest at around 7.25%.

As an incentive to borrowers there is a mortgage type known as the discounted rate, the basics behind this type is that you will still have movement as per the standard variable rate but at a discounted level. Usually the period of time that you would be on a discounted rate would be for the first couple of years and then you would move onto the standard variable rate. An example the variable rate mortgage may have an interest rate of 7.25% and you may have a discounted rate of 5.25% which offers a discount of 2% for the first two years, this is good for first time buyers who need some time and financial assistance at the beginning with a reduced mortgage rate. The obvious problem with this type of mortgage is you will be tied into the mortgage with the lender for a minimum of two to three years after the discounted rate ends and then you will be on the variable rate of interest and at the mercy of the bank of England.

Tracker rate mortgages are seen as an alternative to the standard variable rate. A tracker mortgage offers a fixed rate of interest difference between the base rate of interest and the mortgage rate, so for example your tracker mortgage may be set at 1.5% above the underlying rate. No matter what happens with the base rate of interest your mortgage rate will always be this level above the base rate. With this form of mortgage any cuts in interest rates will always be passed on to you by the mortgage lender, on the flip side any increase in interest rates will also be passed on.

Capped rate mortgages provide the borrower with the reassurance that if the interest rates rise over a certain level then this will not be passed on to the mortgage rate. If the mortgage rates are below the capped level then you will still be paying the same amount as someone on a variable rate mortgage. Again these tend to only be for the first couple of years of the mortgage agreement and then you move onto a standard variable rate.

As it can be seen from the different types of mortgage available there are significant differences in how much interest you can end up paying on your mortgage. For many people who take out a mortgage they will want to have the cheapest option available to them which has the lowest mortgage rates attached. When selecting the right mortgage for you be careful to consider not only the first couple of years when you may be enjoying good fixed rate deals or discounted rates but if you move onto a variable rate check the details of this as well. Many people come unstuck and forget to pay close attention to the bigger picture and will end up being locked into an expensive mortgage that doesn’t serve their needs. If you are looking to compare mortgage types then make sure you check the monthly costs against the annual percentage rate of interest. Two mortgages with the same APR can come in at different monthly costs allowing you to make a saving even though they compare at the same rate. Always be clear on any costs that may be charged by the lender for setting up the mortgage and any charges that can be accrued if you decide to change mortgage provider at a later date.