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2. Choosing the most suitable interest rate structure

The first question that most people ask when considering a new mortgage is 'What type of interest rate structure is best for me? - Should I take a fixed rate, a capped rate, a discounted rate, a stepped rate, a standard variable rate or a cashback deal?' Indeed this all important question is one that needs very careful consideration. So let's look at each of these options in turn and attempt to simplify the choices available.

The following summary should help you to understand the pro's and con's of each type of product:

PRODUCT TYPE	ADVANTAGES	DISADVANTAGES
Fixed Rates	Ability to budget with certainty. Could save money over the long term, particularly if interest rates rise. It may be possible to fix at a lower rate than the usual variable rate.	No benefit from reductions in rates. Could cost money if interest rates fall. The lender may impose early redemption penalties The lender may insist on arranging some insurance policies. An arrangement fee may be charged.
Capped Rates	Ability to budget with certainty. Benefit of reduction in interest rates if they fall below the cap. Could save money over the long term if interest rates rise.	The rate may also be collared at a level below which it cannot fall. The lender may impose early redemption penalties. The lender may insist on arranging some insurance policies. An arrangement fee may be charged.
Discounted Rates	A saving can be made over the period of the discount. Benefit is gained if interest rates fall	The monthly repayments will increase if interest rates rise. The lender may impose early redemption penalties. The lender may insist on arranging some insurance policies. An arrangement fee may be charged.
Stepped Rates	As with fixed and discounted rates plus; Ability to tailor the rate to take account of anticipated changes in circumstances i.e. increases in salary	As with fixed and discounted rates depending on the option chosen.
Standard Variable Rates	Benefit from reductions in interest rates. Flexibility - ability to pay off lump sums without penalty. Many products will feature a drawdown facility to give access to further borrowing. Many lenders who market standard variable rates heavily will charge a very competitive rate. Many of these lenders will charge interest daily rather than annually giving instant benefit from debt reduction.	Will cost more if interest rates increase. No benefit from discounts or cashbacks. No ability to budget with certainty
Cashback Products	Ability to raise additional funds without increasing the mortgage debt. Cashback can be used as part of deposit required for house purchase. Cashback can be used to cover all or some of the fees.	Rate may be variable so repayments will increase if rates rise Interest rate may be loaded. Lender may impose early redemption penalties. Lender may insist on arranging some insurance policies. An arrangement fee may be charged.