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You have to pay interest on any debt, and mortgages are no exception. However they are unusual in the range of options offered.
When choosing a mortgage always remember that you're going to pay a fair price in the end, and usually switch to a variable rate at some point in the term.
Very low initial costs often have a potential sting in the tail, ( e.g. an above market rate with penalty escape clauses). Check.
Your main options are to pay as you go, ( the Variable rate ), to Fix the rate for an initial period, or to Cap the rate. You may also be able to Roll Up some or all of the early years payments. However this increases your debt and results in paying interest on interest. Avoid.
You pay the going rate, on your outstanding loan, and it changes every time interest rates change. ( Though most schemes now simply change once a year. This is easier to administer and aids budgeting ). However you start your mortgage it is likely to change into one of these at some point.
Your interest is fixed and not affected by rate movements. Ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit.
Go for a 2-4 year basis if using them to protect the budget. ( Shorter and rates will not move very far anyway, longer and you risk tying yourself in if rates fall ).
Used as marketing tools they can range from sensible deals offering market rates, but secure against rises, to silly low rates. It is these low rates that you need to be careful about. Some lenders may be using them to trap you into paying over the odds down the line. See how long you will have to stay with the lender before you can switch without penalty.
I would normally avoid very low initial rates unless the property needed a lot of quick spending and the trade-off was OK.
As fixed, but if rates fall you pay the lower rate. Not very common but can be a very good buy from a budgeting point of view if available at the time.
My own rate is 4.99% Capped for three years (July 99 -2002). My broker found it using the industry databases. Always use and expert for his practical market expertise, even when you know the theory!
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