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12 January 2009
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| Fixed rates, standard variables, trackers, discounts… What exactly do these terms mean? |
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It is true that there are some confusing descriptions out there. In the spirit of our commitment to using plain English, here is an attempt to explain the jargon for you…
Fixed Rate
A loan where the initial payments are based on a certain interest rate for a stated period and the rate payable will not change during that period regardless of changes by The Bank of England. There is usually a penalty if you pay off all or part of the loan during the fixed period.
Bank of England base rate
This is the benchmark lending rate regulated by the Bank of England. If this is altered in an attempt to control the overall economy, then the lenders will normally follow its movement and alter their own Standard Variable Rate.
Standard Variable Rate
Usually the standard rate of a lender that will vary over the term of the loan, normally in line with the general cost of borrowing and changes made to The Bank of England’s base rate.
Discount Rate
Discounted rates are lower than the current standard variable rate for a certain period, usually shown as a fixed percentage reduction to the lender's normal variable rate eg. 2.00% discount for 3 years. There is usually a penalty if you pay off all or part of the loan during the discounted period.
Interest Only
With an interest only mortgage or loan, the monthly repayment covers only the interest element of the mortgage or loan leaving the capital outstanding at the end of the mortgage or loan term.
Capped rate
Some lenders will, for a guaranteed period, ensure that your rate does not exceed a fixed upper limit, even if interest rates rise beyond that limit.
Tracker mortgage
The lender agrees a rate linked to the Bank of England base rate. The Bank of England reviews the base rate every month. If their base rate goes down, your mortgage payments will go down. However, if they go up so do your payments |
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