Whatever mortgage you negotiate, an ordinary repayment mortgage or one of the various types of interest only mortgages, the amount of your monthly and total outlay in repaying the loan will depend on the interest rate that is applied to the original mortgage. As we will discuss below, there are several different interest rate options available. Choosing the right one for you can result in considerable savings. The first of the options that we will consider is the fixed rate mortgage.
The Fixed Rate Mortgage
The fixed rate mortgage is what is says on the pack. The lender and the borrower agree, in the mortgage deal, that the interest rate will be fixed for a certain period of time. This means that the borrower knows exactly what his interest payments will be until the end of that period. This is attractive, because it allows for clear budgeting for a period that may be anything from three to five years. The benefits of a fixed rate mortgage are even greater if there are significant rises in the base borrowing rate during the course of the fixed rate period. However, if there are significant reductions in the interest rate, a borrower with a fixed rate mortgage can find that he is paying substantially more than a borrower who took out a variable rate mortgage from the outset.
The fixed rate mortgage, therefore, brings certain risks, not least because it can be extremely expensive to get out of the arrangement early. It dies, however, have the advantage of certainty, at least over a limited period. When the fixed term ends, the mortgage returns to the vagaries of the variable rate.
Having considered the fixed rate mortgage, we will now look at a second type of mortgage interest type, namely the variable rate mortgage.
The Variable Rate Mortgage
The variable rate mortgage is also as it describes itself. The interest that the lender charges the borrower is based upon the Bank of England base interest rate. Obviously, this rate varies from time to time, causing the variable rate mortgage to similarly vary. The interest on the variable mortgage is not pegged to the Bank of England base rate. It is higher, by a varying number of percentage points, according to the lending institution and/or the financial circumstances and history of the borrower. When the Bank of England Monetary Policy Committee decides, after one of its monthly reviews, to increase the base rate (normally as a means of controlling inflation) the lending institutions will increase their variable rate. They will lower the rate when the Bank of England decides to lower the base rate, although not frequently as quickly! The benefit of having a variable rate mortgage is that, in times of recession and low interest rates, the mortgage payments that the Having looked at the variable rate, we will now consider a variation on that type of mortgage. namely the tracker mortgage.
The Tracker Mortgage
The tracker mortgage is a variable rate mortgage that is also based upon the Bank of England base interest rate. However, the tracker mortgage is set to be much closer to the Bank of England Base Rate. It can often be only a fraction of one percentage point above the Base Rate. Unlike the variable rate mortgage, the tracker mortgage can be limited to a fixed term. Alternatively, it can be set for the lifetime of the mortgage. Bearing in mind that the interest rate differential between Bank Of England Base Rate and variable rate mortgages compared to Base Rate and tracker mortgage rates is virtually always significantly higher, one might ask why borrowers offer the base rate tracker mortgage in the first place. The answer to that question is a straightforward one. In times of hardship, recession, depression or economic uncertainty, where the public is reluctant to enter into debt, particularly significant long- term debt such as a mortgage, borrowers have to go to the market with deals that might persuade them to borrow despite all their reservations. Although the tracker mortgage is susceptible to the fluctuations in the Bank of England Base Rate, over which the borrower has no control, the beneficial interest rate and the important feature that the borrower will reduce the interest rate immediately following a reduction in base rate by the Bank of England can make it an attractive proposition, particularly if interest rates fall during the tracking period.
We have so far discussed variable rate mortgages and fixed rate mortgages of varying types. The next mortgage we will consider is a mixture of the two, allowing for some variation but providing protection against significant rises in the Bank of England Base Rate. This is known as the Capped Mortgage.
The Capped Mortgage
The capped mortgage is basically a variable rate mortgage that is based upon the Bank of England base interest rate. However, the capped mortgage has a built in protection against significant increases in the Base Rate.
The capped mortgage works like this. The borrower takes out a mortgage, which is similar to the variable rate mortgage, in the sense that the interest rate applicable to the mortgage is tied to the rises and falls of the Bank of England Base Rate, as set by the Bank of England Monetary Policy Committee from time to time.
However, unlike the usual variable rate mortgage, there is a lever above which the interest on a capped mortgage cannot rise. In periods where interest rises dramatically, the capped mortgage provides the borrower with a buffer, whilst still allowing him to benefit from reductions in the base rate.
The benefits of the capped mortgage are obvious. It should be said, however, that they can be hard to find and that they can also be relatively expensive to obtain and, frequently, the interest rate offered (the differential between base rate and mortgage rate) can appear prohibitive. Nevertheless, they must be seen as potentially a good deal to investigate. borrower is making can plummet. Conversely, in times of rampant inflation, as in the 1980s, borrowers can find that interest rates are so high that they simply cannot afford to maintain their installment payments. Inevitably, in those circumstances, they end up losing their home.
The next type of mortgage on offer is less set, as it were, than those that we have discussed hitherto. That is because we are now going to look at the special deals that certain borrowers are prepared to advance to attract new business. We will simply describe it as the New Borrower Mortgage.
The New Borrower Mortgage
This type of mortgage is another that is basically a variable rate mortgage that is based upon the Bank of England base interest rate. However, in an effort to obtain new business from borrowers, sometimes at the expense of their existing lenders, the lender will offer a significant interest discount on their usual variable interest rate. Often to the irritation of their existing customers, new borrowers are offered these favourable interest rates in an effort to tempt them to bring their business, whilst the rates for existing borrowers remain fixed to the variable rate appropriate to the particular borrower.
The special rate that attracts the borrower is for a limited period of time only. At the end of that period the interest rate will then become the same as the normal variable rate that the other existing customers of the lender.
These special deals can be attractive, particularly for borrowers who are tied in to an adverse interest arrangement. It is important, always, to consider the financial penalties involved in switching mortgages, which may completely negate the worth of the special deal in the first place!
The final type of mortgage that we will discuss is yet another variation of the several themes that we have already considered. We have looked at fixed rate mortgages and we have also considered the tracker mortgage. We will now look at a mortgage that is a combination of the two; namely the combined Fixed and Tracker Mortgage.
The Combined Fixed and Tracker Mortgage
This type of mortgage combines the perceived benefits of the fixed rate mortgage and the tracker mortgage. Like the fixed rate mortgage, the interest rate is fixed for a certain period of time. At the end of the fixed rate the mortgage reverts to a variable interest rate. However, unlike the simple fixed rate mortgage the interest under the combined fixed and tracker mortgage will be similar to the standard tracker; that is to say significantly lower than the standard variable rate This type of deal appears ideal. However, there can be quite severe penalties for trying to get out of the deal early and the interest rates that are fixed can also be prohibitive. Nevertheless, these deals are worthy of investigation. Conclusion.
Hopefully, this brief article will provide some idea of the types of mortgage interest provisions that are available in the market nowadays. As always, take advice, shop around and choose carefully!
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