When deciding loan options that best suit you, it's crucial to ensure that you know what interest rate is attached to each product before you make a choice.
Although the Bank of England sets the base rate of interest, the actual interest that you pay back on a loan can vary greatly from this. Understanding the different interest rate options available to you is hugely important, especially when you're estimating how much your repayments will be for the foreseeable future.
What interest rate options are available?
Here's a brief summary of the most popular interest rate options offered by lenders in the UK.
- Standard variable rate: often described as the most simple interest rate option, this rate varies in line with the lender's mortgage rate, which in turn is usually determined by the Bank of England base rate.
- Fixed interest rate: through this option, your interest rate payments are fixed for a given amount of time. At the end of this period, your lender will may switch over to the standard variable rate
- Tracker interest rate: this is a variable interest rate option that is set a certain amount above or below the Bank of England rate (or any other agreed rate), and fluctuates in line with it.
- Discounted interest rate: this option often involves a discount on the lender's standard variable rate for an agreed length of time.
- Capped interest rate: this variable interest rate option is linked to a given base rate, but a cap is set so it doesn't rise above a certain level.
- Collared interest rate: this is usually used in conjunction with a capped or tracker interest rate option, and ensures that your rate will not fall below a certain level.
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