Mortgage rates explained
The standard variable rate mortgage
This is the lenders basic product; it does exactly what its
name suggests in that the interest rate varies with the market. Variations tend
to be when the Bank of England change the base rate all lenders generally
follow by changing their standard variable rates. However these rates can
change with other market conditions such as economic changes, inter bank
trading etc.
As the interest rate varies from month to month this affects what must be paid
each month, if interest rates increase or decrease the monthly payment will
follow suit.
Fixed-rate mortgage
Again, the fixed-rate does exactly what its name suggests,
the rate of interest, and so the monthly payment, is fixed for an agreed
period. Due to the security borrowers have in this type of mortgage knowing
their payments will be at a set amount each month and with no risk of rate
increases from month to month. This is a highly competitive area between
mortgage lenders where very attractive fixed rates are usually on offer to
tempt new or existing borrowers.
Discount rate mortgage
This is simply a reduction in the lenders standard variable
rate for an agreed period. This type of product is designed to attract new
business in the same way as the fixed rate product. Lenders often include an
'Early Repayment Charge' to deter borrowers from switching during the discount
period or soon after it ends. Unlike the fixed rate there is no protection
against rises in the lenders standard variable rate however, borrowers can
benefit when the rate reduces.
Capped-rate mortgage
This is a variable rate mortgage that benefits the borrower
in two ways. They will benefit from rate reductions in the lenders standard
variable rate, however if the standard variable rate increases beyond a capped
rate the product acts as a fixed rate in that they will only be charged the
rate of the cap. For example a capped rate of 5.5% if the lenders standard
variable rate is reducing 5%, 4.5%, 4% the borrower benefits from these
reductions. However if the rate increases beyond 5.5% the borrower is only
charged 5.5%.
Base-rate tracker mortgage
Another variable rate mortgage where the rate charged is in
line with the Bank of England base rate for an agreed period. The Bank of
England base rate is reviewed on the first Thursday of every month. Base-rate
tracker mortgages are usually a fixed percentage above the Bank of England base
rate. Therefore the rate is guaranteed to be reduced following a reduction in
the Bank of England base rate. This typically occurs the following month but
for some lenders it may be immediately. These rates will also increase
following an increase in the Bank of England base rate.
There is another form of tracker mortgage; this follows the London Inter-Bank
lending rate (LIBOR), a rate at which banks borrow from one another. This is
generally used by lenders who specialise in providing loans to borrowers with
impaired credit ratings.
Flexible mortgage
There are many variations of what a flexible mortgage is,
however all have the following characteristics
- Interest calculated daily
- Facility to make overpayments
- Facility to take a payment holiday
These features and others are generally added to any of the
above mentioned mortgage types to provide flexible benefits to the mortgage
product.
Offset mortgage
The offset is one degree above a flexible mortgage; it
provides many of the features of a flexible mortgage but with an added
advantage. If the borrower has any savings accounts, these can be transferred
to the mortgage lender and held in a special savings account linked with the
mortgage. Any savings amounts held will then offset against the mortgage loan,
this results in an interest saving. For example if the mortgage balance was
£80,000 and the borrower had £5,000 of savings, these could be combined
offsetting the mortgage amount to a value of £75,000 so that interest will only
be charged on this amount. Some offset mortgages even include a current account
facility
|