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On fixed rate products lock-ins like redemption penalties, overhangs and high upfront fees are commonly applied so it is important to calculate your estimated total cost of mortgage with these deals as well.

Capped
A capped rate mortgage is nearly the same as a fixed rate mortgage with one difference. That is if the lenders standard variable rate drops below the capped rate the borrower gets a discount in payments based on the new variable rate. However if rates go the other way then the lender only has to charge a maximum of the agreed capped percentage rate of interest. Again, as with fixed rates, high up-front charges and ‘lock-ins’ are common with this type of mortgage.

Discount
A discounted rate mortgage is where the lender offers you an introductory period where the rate will always be a certain percentage below the standard variable rate for the lender. The rate is variable but will always be below the SVR by a certain agreed percentage for the promotional period. With these mortgages up front costs are not as common but redemption penalties and overhangs are still common.

The other problem is that with a discount, some borrowers can get a nasty shock when the period ends and the payments take a huge hike if the discount is significant.



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