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Mortgages - Types Of Interest Rate
By: Baymaster
Types of Interest Rate
When you have researched into all the different mortgage types and found a
suitable one for you. Now is time to look into what type of interest rate you
wish to pay? The type of interest you wish to pay will depend on your
circumstances and how much you are willing to pay out every month. You will find
out below that not all interest rates/types are the same.
Discounted rate
A discounted rate allows the buyer to pay a reduced payment for a fixed amount
of time. After the fixed term is aver the rate usually increases to the national
base rate. Discounted rates are attractive for first time buyers and also home
buyers who require extra cash for renovations. The term of discount does give
you time to get used to having a mortgage payment.
Fixed rates
With a fixed rate mortgage you are guaranteed the same rate of interest every
month for a fix period or term. This rate will not fluctuate as long as you are
in an agreement for a fixed term. The fixed term can be anywhere from 1 to 7
years. Do be careful when taking a fixed rate mortgage term don’t forget to ask
the lender if you have any obligation to stay with the lender after the fixed
term is over?
Variable rate
Variable rate mortgages do tend to fluctuate around the base rate, and are
generally higher then the discounted, fixed and capped rates that are also
available. Usually, after you have been at a discounted rate, your interest rate
will move up to a variable rate. This could be for a specified time you have
agreed to with the lender.
Capped rate
With a capped rate mortgage, the lender will cap the mortgage rate to a specific
amount, which allows the interest rate to never rise above this level for a
fixed term. However if the interest rate decreases? So will your rate.
Tracker mortgages
A tracker mortgage actually tracks the Bank of England base rate. This means
your mortgage stays in line with interest rates. The way a tracker reflects on
your monthly mortgage interest payments is that they go up when the base rate
goes up and go down when the base rate goes down.
Similar to a standard variable rate mortgage a tracker follows the percentage
rate imposed by the Bank of England. Unlike the standard variable rate mortgage
changes annually or monthly a tracker mortgage guarantees to follow changes in
the Bank of England base rate within 2 weeks of the interest rate changing,
allowing the borrower to benefit from both falls and rises of the interest rate
quicker.
However, there are disadvantage to tracker mortgages. If interest rates were to
rise sharply, so too would the cost of a tracker, so in situation like this you
would lose out and find yourself paying more per month that you did the previous
month. In this type of situation a fixed rate or a capped rate mortgage would
have been advantageous to the borrower.
Trackers do work better for the borrower when interest rates are falling but if
you look at the bigger picture, they give you clear insight to whatever the Bank
of England does with rates. With a tracker both the borrower and the lender know
exactly what they are getting.
Flexible Mortgages
With a flexible interest mortgage, you the lender can usually pay more if you
have extra cash available, pay less if you need to save a little, maybe even
take a holiday from your payments. Flexible is what it is, flexible. Also the
interest on a flexible mortgage is calculated daily instead of annually. So you
reduce the interest amount with every payment.
Checking the APR
Always remember to check the Annual Percentage Rate (APR) of the mortgage you
are considering taking out for a specified term. Usually the lower the APR the
cheaper the rate at which you will pay back every month. However do be careful,
some lenders will offer you the opportunity to take a very low APR over a fixed
period and then a standard rate for a further fixed term. Situations like this
can potentially turn to disaster for some people. If you have discounted
mortgage rate for two years at 3.9% which totals a monthly payment of £300 per
month, after the 3.9% term has ended, you are still in a contract with the
lender for a further two years at a rate of 5.9% you will find that the payment
will increase substantially.
In this situation you could find yourself not being able to afford the mortgage
payment, also unable to transfer your mortgage to another lender due to
redemption penalties for early breach of contract.
Redemption penalties
The various discounted mortgages available e.g. capped, discounted and fixed do
tend to carry a redemption penalty. This is due to the lender operating a
special rate for the fixed amount of time. Some of the standard rate periods can
be for a longer period than the special rate term. So do not forget to read the
small print, and always remember to ask about the redemption penalties and the
standard rate period of the mortgage you are enquiring about. There are
mortgages out there now that offer no fixed penalties or require you to be tied
in with a lender over the discounted period.
About the Author:
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