What types of interest rate are available?
Having decided between repayment and interest-only mortgages, you're then faced with a second decision. What sort of loan do you want?
The simplest is a variable rate. The rate of interest on your mortgage, and therefore your monthly payments, simply goes up and down according to whatever interest rates currently are in the economy at large. The only problem is that this variation can be very wide. If interest rates move from 5% to 15%, which has happened within the last ten years, your monthly payments triple.
Strangely, many borrowers don't like the prospect of this happening, and are therefore attracted by two sorts of guarantee which lenders offer: fixed and capped rates. A fixed rate mortgage is what it says: the interest rate is set at a certain level, and therefore so are your payments. A capped rate is slightly more complex: there is a maximum level above which your payments can't rise, but they can also fall if prevailing interest rates fall below the cap.
On a 25-year loan these guarantees are quite dangerous for lenders to make. They have major problems if prevailing interest rates are 15% but they have fixed or capped people's mortgages at only 5%. In fact, they would go out of business. Therefore, fixed and capped rates are only usually available for the first few years of a mortgage (up to 5 years), after which the mortgage switches to the normal variable rate.
The other short-term incentive which lenders offer is discounted rates. Your payments are variable, but you get a discount off the standard variable rate. Once again, this discount is only for a limited period.
These short-term incentives only make commercial sense for the lender if you stay with them beyond the point at which the incentive ends. Therefore, there are almost always stiff early-payment charges (redemption penalties) if you try to pay off a fixed, capped or discount mortgage before the incentive period ends.
If the range of products on offer were not already confusing enough, there are two other incentives which have become popular in recent years.
The first is "cashback", which is not fundamentally different to getting cashback at a supermarket. You take out a loan with a lender, and they give you not only the amount you are borrowing, but a bit more as well. This can be used for home improvements, furniture, a party etc. Ultimately, of course, you are paying for this cashback in one form or another. There's no such thing as a free lunch.
Finally, there are "flexible" mortgages, increasingly driven by new technology and its ability combine many different financial schemes in one place. In a flexible mortgage your mortgage loan is combined with other sorts of debt such as credit cards, and sometimes even with your current account. The idea is that the rate on a flexible mortgage may be slightly higher than the standard variable rate, but you benefit from lower rates on your credit cards and from earning interest on your current account.