Fixed rate Mortgages: With a fixed-rate deal the repayment level is clear from the outset: the interest rate stays the same for a set period. All other home loans have a variable rate. Your repayments are unaffected during this period by either rises or falls in the Bank of England Base Rate. So a fixed rate is protecting you against a rise in rates, but not offering the opportunity to benefit from a fall.Tracker or Variable rate mortgages: These follow the movements in the base rate.

A tracker's rate is tied to it and so will always follow it precisely whereas on a variable rate mortgage it's up to your lender to decide whether your rate changes and by much (they'll almost always increase their rates in line with any base rate rise but some do not always pass on the full value of a rate cut). If you’re happy to have your repayments vary with general market trends then this is the mortgage for you. You benefit if the base rate falls and lose out if it rises. If you think that interest rates are going to fall or remain basically the same, then this might be the mortgage for you.

Capped-rate mortgages: Your rate can only go down during the time period that the capped rate applies. Sound ideal? Well, if you think that interest rates are going to go down, but also want the security of knowing that you won’t pay more than a particular amount, then this might be the deal for you. However, there is a price to be paid for this security with rates normally starting higher than tracker rates and fixed rates.

Many mortgages start off with special introductory rates, and then revert to the Standard Variable Rate Mortgage after a certain period. These include capped and collared mortgages. There are also fixed rate and interest only mortgages available, which are covered in more detail on other pages. When considering mortgages with special introductory rates, you should also take into account what the Standard Variable Rate is likely to be once your initial period is over. Many mortgages come with the condition that you stick with the same one for several years, even when the special offer period is over. There will often be penalties if you want to change mortgage within this tied period.

Interest calculation and interest charging

Be aware that there is a difference between interest calculation and interest charging. Some mortgages calculate interest on a daily basis, which works out as fairer for the borrower as your overall balance is reducing every month, and therefore the interest will be reducing too. Other lenders calculate interest monthly or annually, although annual calculation should be avoided if at all possible, as you will be paying the same interest for a whole year despite your balance having been reduced by your repayments. You should also ensure that your interest is charge in arrears, rather than in advance.

If you refinanced your old mortgage or purchased your home with an Variable Rate Mortgage, you might wonder what will happen once the introductory period of your loan ends. Many homeowners that financed their homes with these risky variable interest rate mortgages are in for a shock when the mortgage lender adjusts the interest rate and monthly payment. If you are one of these homeowners, here is what you need to know to protect yourself from a mortgage payment crisis.