Types of interest rates

Discount
A discount mortgage offers a reduction on a given interest rate. For example, it could be 0.5per cent off the lender's standard variable rate for a set period. If the standard variable rate changes, so does the discounted rate.

Key pros and cons of discount rate mortgages

Pros

• The interest rates are less than the standard variable rate.
• If interest rates fall, you'll get the benefit.

Cons

• After the discount period ends, you'll normally start to pay the lender's standard variable rate - so there may be a big increase in your monthly repayments.
• You may have to pay a penalty if you want to switch to another mortgage before the discounted rate ends, and sometimes for a set period after.
• The biggest discounts usually last for a very short period. For example, a 2.5per cent discount may be for six months only.
• If interest rates rise, so does the discounted rate.

Capped
Capped rates won't rise above a certain level. This is set for the cap period, usually one or two years. For example, you may take out a capped rate mortgage at 5per cent, so you know that for the cap period this is the highest level of interest you will have to pay, even if interest rates climb to 7per cent, 8per cent or beyond.

Key pros and cons of capped rate mortgages

Pros

The cap term doesn't normally last longer than two or three years.

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