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.
A discounted rate allows the buyer to pay a reduced payment for a fixed amount of time. After the fixed term is over the rate usually increases to the national base rate. Discounted rates are attractive for first-time buyers and also homebuyers who require extra cash for renovations. The term of discount does give you time to get used to having a mortgage payment.
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 mortgages do tend to fluctuate around the base rate and are generally higher than 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.
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.
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 is a disadvantage to tracker mortgages. If interest rates were to rise sharply, so too would the cost of a tracker, so in the 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 into whatever the Bank of England does with rates. With a tracker, both the borrower and the lender know exactly what they are getting.
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.
The variously 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.