Fixed Rate is where there is a set interest rate for a fixed period of time, and then at the end of the term the normal variable rate is paid. An arrangement fee is usually payable when taking out this type of Home Loan. With Fixed rate there may be early redemption charge (ERC) that in some cases may even extend beyond the fixed rate term. For example the fixed rate may be for a period of three years but the penalty period may extend to five years, during which you must pay the variable rate that the lender charges.
This practice is considered to be highly unfair, and now many providers offer fixed-rate Home Loans where there is no penalty for paying off or changing the Home Loan once the fixed rate period ceases. A fixed rate may be chosen if you expect interest rates to rise generally, and enable you to plan your budgeting.
Capped Rate Home Loan
Capped Rates varies in line with general interest rates, but does not rise above the interest rate cap, or fall below a certain rate this is called an interest rate collar. This agreement lasts for a fixed period of time, after which the normal variable rate is paid. Capped rates, like fixed enable you to plan your budget accordingly. An arrangement fee must be paid for a capped Home Loan and severe early redemption penalties will be paid during the first few years of a Home Loan if you change providers.
Discounted Rate Home Loan
Discounted Rates are very convenient if money is rather tight at the beginning of the Home Loan, but is likely to improve in the near future. It has a lower rate of interest in the earlier years and is predominantly intended for first time buyers, who initially have a low income.
However, caution should be taken when dealing with discounted rates, as with some deals the discount is not genuine and the interest saved in the earlier years is just added to the outstanding loan. These deals can cause a lot of problems when the outstanding loan becomes larger than the value of the home, or when you decide to move.
There are early redemption penalties with the discounted-rate Home Loan, and this penalty period extends further than the discount period, which therefore locks you into the lender’s standard variable rate.
Variable Rate Home Loan
Variable Rate is the typical option chosen, where the interest that you pay depends on the general economy. The interest rates are constantly rising and falling, and therefore makes it difficult to predict what your payments will be annually. In many other countries this option is considered far too risky, due to the uncertainty of the interest rates.
Cash back deals. Some standard variable rate Home Loans offer a cash sum when the Home Loan is taken out, which can be used in any way. This is not an interest rate option, but this sum can be invested and can be profitable.
With cash back deals there is an early redemption penalty period of five years, in which should you pay part or the entire Home Loan, you must also pay the cash back received. It may be beneficial to combine different interest rate options and some lenders allow you to do this.