Fixed Rate Mortgages
A fixed rate mortgage is where the interest rate in fixed for a certain period. At the end of this fixed term the standard variable interest rate applies. Most fixed rate mortgages have some kind of fee applied to the mortgage by the lender. This is offer referred to an agreement fee.
There is also in most cases an early redemption charge that offer last longer than the fixed rate. The down size is that you are locked into the mortgage longer than the fixed rate applies. In the industry this is know as an over hang. A lot of pressure has been placed on the lenders to reduce the over hang period but always check the early redemption period before going ahead with the mortgage.
The best time to consider a fixed rate mortgage is if you believe that the base rate is likely to increase over the next couple of years. It important to understand that a small increase on the base rate has a knock on effect on all standard variable mortgages. A fixed rate mortgage means that if the base rate does increase the mortgage repayment rate will not increase as long as the mortgage is within the fixed period. This means it is much easier to budget, as the repayments remain stable over the fixed period.
Capped Rate Mortgages
A capped rate mortgage has a ceiling on the interest rate that the lender can charge over a period of time. The interest rate is still variable, meaning it moves up or down in line with the base rate, however the interest rate will not above the capped rate.
This type of mortgage is very good if you have no idea if the base rate will go up or go down. A capped rate mortgage still gives the benefits if the base rate goes down, unlike a fixed rate mortgage. The capped rate does mean tt you are protected if the base rate goes above the capped rate.
Most capped rate mortgages have fees that are chargeable at the start of the mortgage and they also have early redemption penalties if you wish to pay the mortgage off early or change the mortgage to a new lender.