Mortgage
Interest Types - Mortgage Information
What
are Mortgage Interest Types?
Types
of Mortgage Interest rate
There are are a few different types of interest rate but the most
important one is the standard vriable rate (SVR). This is the rate
mortgage lenders will charge as standard, once any introductory
discount rate periods have ended. If the SVR is high and you are
tied into the sceme with an overhanging redemption penalty you could
stand to lose all that you have gained from the introductory discount.
Standard
Variable Interest Rate Mortgage ( SVR )
With an SVR your mortgage lender sets the interest rate you pay.
The mortgage lender bases this rate on the Bank of England's base
rate, and so when the banks base rate changes the standard variable
rate will change. The SVR is normally between 2 and 4 percent higher
than the banks base rate, but varies from lender to lender. The
advantage of this is that when the Bank of England's base rate is
low your monthly mortgage interest repayments will be low too. Of
course when the base rate is high you will be paying higher monthly
repayments.
With
an SVR you are able to change lenders at any time without being
penalised with early redemption penalties. If you start a mortgage
with a different type of interest repayment for an agreed term,
once the term finishes you will go back to the SVR. A standard variable
rate is most suitable for someone who is likely to shop around to
get the lowest interest rates, by re-mortgaging regularly. There
are no redemption penalties with a SVR so you can change mortgage
lenders with no charge.
Fixed
Interest Rate Mortgage
Fixed rate mortgages allow you to repay interest at a fixed rate,
irrespective of the Bank of England's base rate fluctuations. Your
monthly repayments will remain the same every month for a time period
agreed between you and the lender (normally between 1 and 25 years).
Once that period ends your mortgage will be transferred to a standard
variable rate mortgage.
There
is normally a fixed period involved, there is a redemption penalty
charged for leaving the mortgage before the fixed rate term has
ended. You may find that this period continues after the fixed rate
period finishes. This means you could be tied into the mortgage
for several years after the fixed rate period has ended. If the
mortgage lenders SVR is high you are stuck with it, unless you pay
the redemption penalty in order to leave the mortgage.
The
lenders SVR is often the most important factor to consider when
choosing a mortgage. You may have a low fixed rate for a number
of years, but if you are tied in for several years after the fixed
rate has ended, you could find yourself paying a high SVR and losing
all that you gained.
Fixed
rate mortgages are suitable in certain situations only. If the Bank
of England's base rate is fluctuating a fixed rate mortgage might
be a good one to go for because your mortgage payments will remain
the same so you can budget more easily. If the Bank of England's
base rate remains consistently lower than your fixed rate you would
stand to lose a lot of money unless you could come to an agreement
with your mortgage lender. Another disadvantage is that a lender
might need a non-refundable up front booking fee to be paid on application
to reserve the mortgage. Arrangement fees for mortgages are often
required with this type of rate.
Discounted
Interest Rate Mortgage
A discount mortgage rate is a variation of the standard variable
rate. It provides a discount from the lenders SVR for a fixed period
of time agreed between borrower and mortgage lender. Often the larger
the deposit you provide the larger the discount will be. The same
rule occasionally applies if the property price is very high. The
interest rate still fluctuates, that means your monthly repayments
may change slightly from month to month, but the discount remains
constant. A discount rate mortgage is an incentive scheme used by
lenders to attract new customers. Some discounted rate mortgages
also include some cash back.
Discount
rate mortgages might be most beneficial to first-time-buyers as
the savings made in the early years of the mortgage could be used
to furnish the house. But early and overhanging redemption penalties
nearly always apply so its worth finding out the lenders SVR as
well so you know how much you will be paying once the discount period
ends.
Capped
Interest Rate Mortgage
Capped interest rate mortgages fluctuate in the same way as a SVR
mortgage, or a base rate tracker but cannot rise above an agreed
percentage. This agreed percentage is the cap and you can enjoy
the low interest rates but your monthly repayments will not rise
too high when the Bank of England's base rate rises.
With
most SVR variations you will be transferred back to the SVR once
the agreed Capped rate period ceases. If you decide to leave the
mortgage scheme before the agreed period finishes you will incur
an early redemption penalty. Some schemes also have overhanging
redemption penalties. The redemption charge still applies after
the agreed capped rate period ends. This means you could be tied
in to the mortgage scheme whilst paying the lenders SVR. You may
also have to pay an application fee when beginning a capped rate
mortgage.
A capped
rate carries the advantages of a fixed rate mortgage, whereby you
can budget better knowing the maximum your monthly repayments will
be. Unlike the fixed interest rate you have the possibility to save
money when the Bank of England's base rate falls. But you may find
that the cap associated with a capped interest rate will be slightly
higher than a fixed rate.
Base
Rate Tracker Mortgage
Base rate tracker mortgages track the Bank of England's base rate
and changes in accordance, with a constant differential, set by
the mortgage lender. Your monthly mortgage interest payments go
up when the base rate goes up and they go down when the base rate
goes down. The base rate tracker interest rate is normally between
0.5% and 1.0% greater than the B.O.E's Base Rate. Base rate Trackers
are available for a fixed term period agreed between borrower and
lender, but can also be used for an entire mortgage term.
Mortgage
lenders usually base the percentage differential (between the base
rate and base rate tracker) on your homes Loan to Value ( LTV ).
A home with a low LTV rate will usually achieve a low base rate
tracker interest rate, whereas a home with a high LTV will usually
give you a higher interest rate differential.
The
base rate tracker mortgage is normally a low interest rate mortgage,
and can be combined with a discount for a fixed period, but it still
has its downsides. As with all fixed period mortgage interest rate
schemes many mortgage lenders will charge a redemption penalty if
you wish to leave the mortgage scheme. Known as an early redemption
penalty. Some mortgage lenders can also charge an overhanging redemption
penalty. This is where the redemption penalty still applies after
the base rate tracker fixed period has finished, and you are on
the lenders SVR. Base rate trackers could be difficult to budget
for as the Bank of England's base rate fluctuates.
List
of Major Mortgage Lenders
OCIS
provide general financial information, we urge you to consult an
Independent
Financial Adviser ( IFA )
before making any important decisions about your finances. |
