My Guide To Mortgage Interest Rates
A mortgage is at its heart a long term loan and like any other type of loan, you can expect to pay interest on the money you have borrowed. However, unlike other loans, the range of repayment options offered on mortgages is vast.
The main types of mortgage rates offered are fixed and variable, but within these two groups there are also many different types including capped rates, tracker rates and many more. This often leaves consumers feeling like they need an English to Mortgage translation phrase book to even make an enquiry about a mortgage these days. This is why I have put together this guide to the most common types of mortgage rates on the market.
You can also get in touch with me at any time for a consultation.
Introduction To Mortgage Rates
When it comes to selecting a mortgage many people develop tunnel vision and look only at the rate being offered. However, there are other important things to take into consideration. It is actually the case that the type of rate being offered has more importance than the interest rate itself as it will have more bearing on future repayments. It is important to consider not only your current financial position, but also where you will be in 5 or 10 years from now. A mortgage is a long term commitment and as such you will need to consider the bigger picture.
Ten Key Questions
Ten Key Questions All mortgage customers should ask ten important questions :
- How much can I afford to borrow?
- How can I tell which mortgage rate is best?
- What is the best type of mortgage for me?
- How should I repay it?
- Can I make lump sum payments?
- Are there any redemption penalties?
- Does this mortgage come with insurance?
- What other charges will I have to pay?
- What happens if I can’t pay?
- What about the small print?
Types Of Mortgage Rates
In theory, mortgages should be fairly straightforward : you borrow money to buy your home, then pay back the loan plus interest. However, in reality things are a little bit more complicated because there are so many different types of mortgages out there to choose from. In order to help you make sense of this mortgage minefield, let’s take a closer look at some of the various types of mortgage rates that are available to you and the advantages (or disadvantages) of choosing them.
Fixed Rate Mortgages
As you might expect given the name, a fixed rate mortgage is one in which a fixed interest rate is paid over an agreed period of time. This is ideal if you want to know exactly how much your monthly repayments are going to be as they will not change from month to month. Since you have agreed a fixed interest rate, even if your lender changes the rate they offer your payments will not change.
This is advantageous if the interest rate increases, but there is also the risk that if rates fall you will be paying more than you need to as you will not benefit from the decrease. A fixed rate mortgage may be for the full term of your mortgage, or may be only for the first 2-5 years, in which case you should begin to look at market rates a few months before the fixed rate ends in case you wish to switch lenders to one offering a more favourable interest rate.
Variable Rate Mortgages
If a fixed rate mortgage is not for you then you may want to look at one of the many variable rate mortgages that are available to you. With these mortgages, the interest rate can change from time to time. Within the heading of variable rate there are several sub-types which may or may not be suitable for your individual needs.
The basic form of variable rate mortgage is the SVR or Standard Variable Rate.With this type of mortgage, the interest rate can move up and down at the discretion of the lender. In some cases the fluctuations may be based on the Bank of England’s interest rates. These mortgages can work out a little more expensive, but they do offer the opportunity to reduce payments when interest rates are more favourable.
Discount rate mortgages are designed to entice you towards a particular lender. You might find it easiest to consider them as a special offer like you might see in a supermarket. The interest rates offered are cheaper than the lenders usual variable rate, but will be linked to it. For example, if the discount offered is 2% and the variable rate changes between 5% and 7% you can expect to pay 3% to 5%. This discounted rate is only offered for an introductory period of between 2 and 5 years, after which you will pay the standard variable rate. The advantages of discount rate mortgages are that you will get a cheaper repayment initially which can help when you are on a tight budget and you will take advantage of any decreases in interest rates; however, on the flip side the variable rate can go up as well as down so you may find that even you discounted rate can rise without much warning making your repayments more expensive.
Tracker Rate Mortgages
Discount rate mortgages are designed to entice you towards a particular lender. You might find it easiest to consider them as a special offer like you might see in a supermarket. The interest rates offered are cheaper than the lenders usual variable rate, but will be linked to it. For example, if the discount offered is 2% and the variable rate changes between 5% and 7% you can expect to pay 3% to 5%.
This discounted rate is only offered for an introductory period of between 2 and 5 years, after which you will pay the standard variable rate. The advantages of discount rate mortgages are that you will get a cheaper repayment initially which can help when you are on a tight budget and you will take advantage of any decreases in interest rates; however, on the flip side the variable rate can go up as well as down so you may find that even you discounted rate can rise without much warning making your repayments more expensive.
Capped Rate Mortgage
A capped rate mortgage usually applies your lender’s standard variable interest rates, but offers a cap which means that the rate will not rise above a set maximum level even if the variable interest rate rises above it. This means that even in spite of the fact that your rate can fluctuate, you can always budget for the maximum amount you will have to pay making it easier to plan ahead. Meanwhile you can take advantage when the interest rate falls, and reduces your repayments.
A collared mortgage is almost like a capped mortgage in reverse! Instead of being guaranteed that your interest rate will never rise above a certain rate, a collar ensures that it can never fall below a minimum rate. This is designed to protect the lender rather than the borrower as it ensures a minimum payment even when the base rate drops below the collar. This is a clause that is often written into variable contracts and it is something borrowers need to look out for.
It is plain to see that choosing the mortgage and the rate type that best suits your needs is a potential minefield! That is why it is always best to seek professional advice before tying yourself to a long term commitment like a mortgage. Although mortgage providers are legally obliged to provide the key facts to their customers, it can still be a little overwhelming if you do not understand the various terms used. Engaging the services of an experienced professional can cut out also of the confusion and if you choose a mortgage adviser then you know you are getting honest and unbiased advice. You may even find that advisers have access to additional rates not offered to the general public.