Fixed and capped rate mortgages

With a fixed rate mortgage your monthly repayments will stay the same regardless of whether interest rates rise or fall. Most people choose to fix their rates for between one and five years, although longer and shorter deals are available.

They are popular because they are useful for budgeting, as one of your largest monthly expenses will not change for the period of the deal. They are also useful if rates look likely to rise in the coming months.

Although they are usually cheaper than the standard variable rate (SVR) at the time the loan is taken out, you risk paying over the odds if interest rates fall. If this happens you will have to weigh up the cost of redemption penalties, which are often steep, to get out of the deal early, against the benefits of taking out a new loan with a better rate.

Redemption penalties generally fall with each year the loan lasts. Particularly low fixed rates may have redemption penalties that overhang, tying you into the lender's standard variable rate for a year or more afterwards.

If interest rates are expected to rise then fixed rates may be higher than standard variable rates. Be wary if rates are expected to fall, as you may be fixing at an unnecessarily high rate.

With both fixed and capped rates, some deals may depend upon buying insurance - building or contents cover, or both - from the lender.

A capped rate mortgage has a specified upper limit above which the rate cannot go, but it will follow interest rates downwards. They are generally worth considering when interest rates are either rising rapidly, or when there is uncertainty over in which direction they are going.

The rates generally apply for periods of up to three years, sometimes longer. They are usually lower than the standard variable rate, but tend not to be as competitive as some fixed and discounted rates.

Some capped rates come with the stipulation that - even if rates drop - your mortgage will not follow beyond a certain point. Deals that come with this sort of "collar" are less attractive, as you will not benefit from sizeable rate falls.

Redemption penalties usually apply for the period of the rate, and may apply for several years beyond then, when you have gone onto the standard variable rate.