Before embarking on what may be the biggest investment you make in your life it is important that you are aware of and understand how lenders calculate the mortgage rates on your loan.
Below we try to explain how the mortgage rates are calculated by the lending companies. There are several types of mortgage rates available on your loan, offering differing degrees of security and risk. The following are just some of the options available to you.
Fixed Mortgage Rate
This option is where the interest remains fixed for a given period. The advantage of fixed mortgage rates is that they guarantee the amount of your monthly loan repayments for a defined period, which is useful for those who would like to be sure of their monthly repayments for a set period of time. You will find though that the more competitive the fixed rate the longer your tie in period* may be.
Variable Mortgage Rate
A variable rate mortgage means the monthly repayment amount is based on the lender's standard variable rate. The lender's standard variable rate is based on the Bank of England's base rate and the rate as the name implys vary's depending on the actual movement of the base rate. Standard variable rates vary from lender to lender but are typically 1.5 to 4 per cent above the base rate. When you are on a variable interest rate you can generally repay your mortgage whenever you like without paying an early repayment charge because there is no tie in period. *
This rate tracks the Bank of England base rate. Tracker mortgages then follow any changes in the base rate, with a constant margin being maintained between the base rate and the interest rate.
Discounted Mortgage Rate
This is set at a discount from the lenders standard variable rate. This means that the interest rate can vary during the tie in period but is always less than the lenders SVR. This option is one to take if it is thought that the interest rates may fall during your period of tie in, but at least if they rise you still get a guaranteed discounted rate from the lenders standard variable rate.
This interest rate is usually the same as the lender's standard variable rate, but will not rise above the capped rate. So for example if the capped rate was 7% and interest rates rose to above this level you would be secure in the knowledge that your interest rates will not increase further than the 7%.
* Tie in Period — A tie in period is the period of time that a lender will expect you to stay with a particular mortgage product. They tie you into a deal because they will have offered you a special rate which could be a discount or fixed rate often for a two year period or the lender may have given a cachback deal for starting one of their products.
After the tie in period generally mortgage rates revert to the lenders standard variable rate.
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