Mortgage Interest Rates
Every lender will charge you interest when you take out a mortgage loan with them. The interest is effectively what you are being charged for the service of lending you the money you need to buy your house. However, different lenders will charge different rates of interest aimed at different parts of the market.
As well as these different rates of interest, there are also many different types of interest. Making sure you pay interest in the right manner for you is crucial in optimising the amount you pay back. With interest, the lower the rate you get, the better.
Here are some examples of interest types:
Tracker mortgages
With a tracker mortgage the rate at which you pay back interest is subject to change. This is because your rate will follow the Bank of England base rate, plus or minus a certain percentage. For example, if the Bank of England base rate is 0.7%, your mortgage rate at +1% would be 1.7%.
This means that while economic conditions are good you can get a very cheap mortgage deal. At the same time, should you be able to afford to do so, you can overpay on your premiums to bring the length of the term of your mortgage down.
However there are risks, and in harsh economic conditions your rate can also suddenly increase. This means that tracker mortgages are not necessarily suitable for those who are running a tight monthly budget
Standard variable rate mortgages
Standard variable rate (SVR) mortgages are another type of mortgage where the amount of interest you pay can change. However, changes within this type of deal are at the lenders discretion, and as a borrower you have no control over this. The rate is still usually driven by the Bank of England base rate, but not always, and SVR mortgage deals have been known to be far over and above the base rate.
Much of the time people on SVR mortgage plans are those who have had another type of mortgage deal come to an end with the same lender. Changing to an SVR will be an automatic process, so it is crucial that you are clear with your lender about what will happen once your current deal comes to an end.
As with tracker mortgages, for cheaper deals that are not high above the base rate, you may find yourself on a very affordable repayment plan, and there are not usually early repayment charges, so you can take advantage of this also. However, and this is crucial for those on a tight budget, SVR mortgage rates can change suddenly, and by fairly significant amounts. Remember your lender has no obligation to reduce your rate when then base rate falls too.
Capped rate mortgages
Capped rate mortgages are a less risky strategy that SVR mortgages. They are similar in that they usually follow the Bank of England base rate for increases and decreases, but they have a security element of an agreed cap that rates cannot rise above. This means you can be confident that your rates will not rise over a certain amount that is affordable to you.
This type of repayment plan is usually only available as an introductory offer, and could last anywhere up to five years, after which you will be transferred to a different type of interest plan. Unlike other variable rate mortgages, capped rate plans will usually charge you if you want to make early repayments. They are also the least common type of mortgage repayment plan, and can have higher rates from the outset.
Discounted rate mortgages
Discounted rate mortgages are another type of repayment plan that offers a strong introductory deal. The name comes from the fact that these are SVR mortgages with a discount applied by the lender. This means that that you will get a slightly cheaper rate than the standard SVR rate, but this will only last for between 2 and 5 years in most cases.
Once your discounted rate comes to an end, you will be transferred back onto the SVR mortgage. The best thing about the discounted rate mortgage is that you are likely to get a very competitive deal whilst you are within the discounted term, especially in stronger economic conditions. However you have to be mindful that you are still on an SVR; your rate can still rise suddenly meaning your original good deal is wiped off. Of course, you also have to keep in mind that you won’t be paying the discounted rate forever. After the discounted rate period, when your are transferred onto the SVR, your payments will go up, so you have to prepare for this if you are on a tight budget.
Fixed rate mortgages
Fixed rate mortgages are again a type of repayment plan where you have a certain deal for a period of time between 2 and 5 years. The fixed rate part refers to the fact that your mortgage payments will not increase over the course of the deal, meaning you know exactly what you will be paying back each month. Once the period is over you will be transferred onto a SVR mortgage.
Fixed rate mortgages are great for those who want peace of mind, knowing that their payments will not increase over a certain amount for a defined period of time. This is especially useful for buyers who are furnishing a home or spending money elsewhere on a property, as you know what you can budget for.
However, even though the risk is taken out of the deal as rates won’t rise, your rates also won’t drop if the base rate happens to be reduced. As well as this, fixed rate deals do tend to have slightly higher rates than variable rate deals, so it is worth considering this before proceeding.
Need more help and advice?
Our team of mortgage advisors can help you with any mortgage queries you have, from finding you a lender, to giving you advice on your current deal. We deal with the whole of market, meaning we are able to find the best deal for you, and not just a compromise from a limited number of providers.
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