Variable

This is where the loan can be set against the lenders standard variable rate.

The rate can generally move up and down when there has been a change in the Bank of England base rate.

Advantages: usually no redemption penalties

Disadvantages: the rate can go up or down, so planning your finances can be tricky

Fixed

These offer borrowers a guarantee of what their mortgage payments will be for a set period of time.

In the UK most fixed mortgage rates are fixed for a period of 1 - 10 years.

After the fixed period the rate will generally revert to the lenders standard variable rate.

Advantages: Convenient for budgeting as you know how much your payments will be.

Also, you will be insulated from any significant upward swing in mortgage rates.

Disadvantages: You run the risk that mortgage rates generally will fall below the level at which you fixed.

Also, fixed rate deals often involve the borrower agreeing to a penalty charge - often up to six months interest - if they decide to redeem or repay the mortgage early.

Discount variable

In the competitive environment amongst lenders, there are a variety of offers that promise a discount off their prevailing variable interest rate.

In other words, the interest rate on offer is set at an amount below the standard variable rate for a period of time.

Advantages: During the discount period your mortgage payments are lower so you have more to spend on other things.

Disadvantages: When the discount period ends your mortgage payments revert to the lenders standard variable rate

In some cases lenders have offered big discounts for short periods of time. e.g. 6% off your home loan rate for six months.

These offers are, in a sense 'too good to be true'. They invariably involve the borrower agreeing to stay with the lender for a period of time or face 'withdrawal penalties'.

Capped

This is a variable rate mortgage with a capped limit beyond which the rate paid will not exceed.

Advantages: Borrowers can benefit when rates fall but have the reassurance that their payments will not rise above the capped rate.

Disadvantages: Like fixed or discount rate mortgages you may have to pay an application fee when setting up the mortgage. Capped rates may be a little higher than fixed rates over the same period.