Variable and discount rate mortgages

Variable rate mortgages are the standard product offered by lenders. Lenders set their own rates, but generally shadow the changes made to the base rate by the Bank of England.

The typical variable rate is about 1.75% above the base rate, and, as the name suggests, varies with the base rate, meaning your repayments can change.

If you take out another sort of deal - capped, fixed or discounted - your loan will revert to the variable rate at the end of the deal period.

Lenders often charge a redemption penalty to switch out of a variable rate deal in the first one to three years of the loan. After that, there is usually no charge. The exception is when you are tied into the variable rate for a set period, which may be the case if you take out a cashback loan. Redemption penalties usually then apply for at least five years.

With a discounted mortgage you pay an initial rate of interest that is a set amount below the lender's standard variable rate (SVR), for a specified period of time. Most discounted loans are for two to three years, although longer ones are available.

Many deals have a stepped discount where the discount decreases in two or three stages. Generally, the bigger the discount, the shorter the period for which it applies.

Redemption penalties usually apply for the period of the loan, and, with particularly generous deals, the penalties may apply afterwards, tying customers in to the lender's standard variable rate for a year or more.

Discounted mortgages are particularly attractive when interest rates are moving downwards; when they move upwards sharply, a fixed rate deal is preferable. Also, watch out for heavy redemption penalties, particularly if they include extended tie-ins.