UK Mortgage Interest Rate Deals Explained

Mortgage interest rates are at the lowest they have ever been, but that is likely to change in the next year or so. It has never been so important, then, to understand exactly what the various different types of mortgage deals will mean to you, over the longterm, as well as now. What you agree to today will be with you for a long time, so read on, and find out what the various types of mortgage interest rate deals really mean.

Interest only

Interest only mortgages are now harder to come by and there is a lot of concern that people who took out interest only mortgages in the past are now sitting on a property time bomb. Interest only mortgages may look attractive, because the monthly payments are lower, but you won’t be paying off any of the capital. That means that you will need to have the means to pay the capital element of the loan at the end of the mortgage, or the property maybe repossessed.

Standard variable rate

The most flexible type of mortgage is usually the standard variable rate (SVR) mortgage. With this type of mortgage, your monthly payments will vary as the base rate does. The interest rate is usually lower than it would be for a fixed rate mortgage and you will be able to pay it off, or change to another mortgage provider, when ever you like.

Tracker

A tracker mortgage is slightly different to a standard variable rate mortgage in that it is guaranteed to follow another interest rate. The standard Variable rate is a rate that is set by the lender and, although they generally do vary in line with the Bank of England base rate, they don’t have to. Tracker mortgages will usually only guarantee the rates for five years and there are likely to be additional fees to pay if you wanted to change the mortgage before the end of the term.

Fixed rate

The benefit of a fixed rate mortgage is that you will be able to plan better, because you will know exactly what the monthly payments for the next few years. Fixed rate deals are usually available for a two, five, or ten, year period. The interest that you will be charged will be higher than the current standard variable rates and fees and initial charges are usually higher too. There can also be substantial fees payable if you want to repay, or change the mortgage.

Capped

A capped rate mortgage will have a guaranteed maximum that the interest rate can be raised to. Repayments will vary with the lenders standard variable rate, but only up to that maximum. The cap, though, will probably be quite high and the interest that you pay will be higher than you would pay with a standard variable rate mortgage.

Offset

Some banks now offer offset mortgages, which means that your savings and the balance on your current account, will be included in the interest calculation for your mortgage. The amount that you have to pay on your mortgage will still change in line with the lenders standard variable rate, but an offset mortgage can reduce the length of time that it will take you to pay off what you owe.

Discount

A discount mortgage is one where the lender will offer you a discount, for a limited period of time, off their normal standard variable rate. These types or arrangements are usually less flexible than a standard mortgage and the discounted rate will probably only last for a year or two. It’s also worth bearing in mind that a discounted rate is only a discount on the lenders standard variable rate, which may itself be much higher than other lenders. When you are comparing deals, compare the actual monthly payment, not just the percentage discount.

As with all types of finance, it is advisable to shop around for a mortgage and see which providers will give you the best deal, or ask an independent financial advisor for help. If you are new to the housing market, do bear in mind that the current interest rates are unusually low because of the financial crisis of a few years ago. Interest rates will rise again soon and so will your monthly repayments.

Source by Neil Savin

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