Mortgage Interest Rates
There are 4 main mortgage interest rate options available to you. These are a fixed rate, variable rate, capped rate and a discounted interest rate. Below we help describe the differences between them.
Types of Mortgage Interest Rates
Fixed Rate Mortgages
A fixed interest rate is one where the interest rate is fixed for a pre determined period of the loan, often lenders offer a fixed period of 2 - 5 years. With a fixed interest rate if mortgage interest rates increase or decrease your rate remains the same for the duration of your fixed rate agreement. The benefits of taking a fixed mortgage rate are that you can budget your expenditure. However it should be noted that most fixed rate mortgage offers incur early repayment charges if you redeem your mortgage before the fixed rate period ends. One draw back with a fixed interest rate is that if interest rates fall you cannot take advantage of the lower rate.
Capped Rate Mortgages
A capped rate mortgage is where there is a cap to the rate of interest you may pay. Capped rate mortgages use the variable rate of interest (explained below), so for example it may be a capped rate of 7%, so you know in advance that if interest rates increase yours will not increase by more than 7%.
If you feel that the market conditions may mean an increase of interest rates then a capped rate mortgage product offers you the borrower an element of protection and an ability to budget your expenditure knowing at the start what is the most your mortgage payments could be.
Discount Rate Mortgages
A discounted rate mortgage is based on a variable rate product with a discount of the normal variable rate for a set period of time. Generally there is a higher rate of discount offered if the discount period is shorter. However the tie in periods can extend beyond the initial period where the discounted rate was given. These products are often recommended where a priority is to keep the mortgage payments as low as possible in the early years, perhaps because this is a first mortgage where budgets are tight.
Variable Rate Mortgages
Variable rate mortgages are just that, an interest rate that varies and can therefore go up or down according to the current lenders rates. However with a mortgage rate being variable means that you cannot budget your monthly repayments adequately since rates do change, but of course if interest rates fall then you rates decrease almost instantly so you can immediately take advantage of lower monthly charges.
Tracker Rate Mortgages
Tracker rate mortgages are variable rate mortgages that generally track the Bank of England base rate for the whole term of the mortgage. There will be a margin between the Bank of England base rate and that which the lender charges and this will be advised to you at the time of applying for this mortgage product.
Each time for example the Bank of England base rate changes so will the payments on your mortgage. This means that your repayments can go up aswell as down. A benefit of tracker rate mortgages is that any rate changes are usually immediate, so you quickly benefit from any potential rate changes when they fall.
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